What happens when you raise your insurance rates, maybe even bydouble-digits, but you don't see any boost to your top- or bottomlines? That's what you call an “invisible hard market”–a veryclever phrase coined last week in an insightful but disturbingstate of the markiet speech delivered by Brian Duperreault,president and CEO of Marsh & McLennan Companies.

You see, the problem, according to Mr. Duperreault, is that whileproperty-casualty insurers are finally poised to shrug off the softmarket and start raising prices again–spurred on by risingreinsurance costs and their own investment losses–since the economyis contracting, carriers are not likely to see any positiveimpact.

With firms either closing facilities, laying off workers orclosing up altogether, there is less insurable exposure out there,so while the price of coverage may be going up, the actual premiumwritten may end up flat or even down this year. That means insurerscould end up treading water financially.

We are in the beginning stages of a hardening market, butcountervailing economic forces are turning this into our firstinvisible hard market, Mr. Duperreault told the annual jointmeeting of the Association of Professional Insurance Women and theNew York Chapter of CPCU.

When our market turns, it usually happens very clearly, he said.Normally, when we stand in the doorway of a hardening market, weknow it. But because of the macro-economic factors at work today,he explained, even though prices are going up, we cannot see thenormally positive effects for the industry

With available risks to insure on a steep decline, he said, thatmeans no dramatic change in the top linewhich, combined withfalling investment income, means no dramatic impact on the bottomline, either. As a result, he observed, the instant gratificationthat usually comes from a hard market wont be available this timearound.

Still, for the moment at least, [insurance] supply has gone downmore swiftly than demand, due to staggering investment losses formany carriers, he observed, forcing insurers to raise prices tocompensate.

He said the reinsurance sector is leading the charge into aharder market, reporting that for Jan. 1 renewals, rates are 10percent higher for national accounts and up 15 percent for regionalrisks, on average. The higher cost of reinsurance will putadditional pressure on primary carriers to raise their own pricesto keep pace, he added.

Warning that p-c insurers are navigating in unchartered waters,Mr. Duperreault said that while we may be entering a harder market,we must continue to operate as if were still in a soft market. Thatmeans vigorous expense control, claims management and underwritingdiscipline.

Predicting that the positive effects of a hardening market forinsurers will become visible eventually, he said a significantcatalyst will be neededsuch as a reinvigorated economy or arebounding investment market.

He also warned, however, that a major disaster loss could changethe p-c landscape in a hurry, prompting a much harder market andstiffer rate hikes virtually overnight.

The p-c industry remains well-capitalized, despite the huge hitsweve taken on the investment side, but our cushion is far thinner,noted Mr. Duperreault. With capital very hard to come by after thehuge financial losses absorbed by hedge funds and other privateequity investors, it will be hard to expand capacity if asignificant disaster strikes, leaving us vulnerable to a majorcatastrophic event, he explained.

Still, he said, things could be worse. Indeed, he added, thegood news is that the much-maligned p-c industry has weathered thisstorm. Weve come through in far better shape than banking has.

He lauded the insurance industry for its more responsibleapproach to risk. As insurers, we think more about holding riskthan trading itas opposed to banks, which packaged recklesssubprime loans and passed them off to investors in what turned outto be toxic securities.

We are professional gamblers, he said, but at least we know theodds on most bets we make.

Conceding that were in for some very tough times, he told thepacked house to thank God you still have a job and work in anindustry thats basically okay and well-capitalized and whichgenerally did not have to run to the Feds window for money.

Outside of a handful of carriersmostly on the life insurancesidethat are scurrying to tap federal funds from the Troubled AssetRelief Program, he said we work in an industry thats needed,relevant and which stood the test of time.

We have been through some odd markets, but never an “invisibleone” before. Still, I sense Mr. Duperreault pegged this one deadon. Insurers, which usually thrive in a hard market, are in for arough ride this time around.

What do you folks think?