NU Online News Service, July 26, 3:35 p.m. EDT

The continuing soft market is weakening the credit quality of property and casualty insurers, making their future "problematic," according to an analysis released by Moody's Rating Service.

In its weekly credit outlook report issued today, Moody's said the latest Council of Insurance Agents and Brokers survey underscores the continuing soft market that the industry is suffering through. Average premium rate declines since the third quarter of last year stand in excess of 5 percent. During the second quarter of this year insurance brokers surveyed said rate declines averaged more than 6 percent.

"In the absence of a significant catastrophe, we do not expect a reversal in the downward slide of commercial property pricing in the near future," Moody's said regarding the property side of the business.

On the casualty side, business reflects the same continued downward slide, Moody's said.

The only reason insurers' earnings have not generally reflected the soft market is that they used reserves built up during the favorable development period from 2003 through 2006, when rates "were at peak levels," Moody's said.

Moving forward, earnings on casualty business in 2011 and beyond will "cease to benefit from favorable legacy reserve development." Those p&c insurers who have written underpriced business will recognize losses in the future, Moody's said, and that will have "an impact to capital in more severe cases."

Evidence from the CIAB survey indicates carriers are offering broader terms and conditions in lieu of increasing price in order to keep market share. This practice, Moody's said, could have long-term negative impact and "is potentially more problematic than rate inadequacy" because it is difficult to understand the full impact those changes can have on a company due to "reduced transparency."

Moody's said, "We believe the sector is offering greater capacity than demand can absorb, and the medium-term outlook doesn't look promising" given the loss in insurance premium demand from the economic downturn.

Finally, inflation is another concern for the industry, according to Moody's. Insurers' profitability could take a hit from the "unexpected cost inflation" to claims impacted by wages, medical costs and commodity prices.

Pano Karambelas, vice president-senior credit officer for Moody's, told NU Online News Service that "no one knows how long this is going to take" before the soft market sees a turnaround. He said the current soft market reflects the historic pricing cycle and the report is a reflection on insurers' profitability into the future.

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Moody&#039;s: Soft Market Could Make P&C Future &#039;Problematic&#039;

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