As investors and insurers digest this year's first wave ofearnings reports, conference calls and financial supplements, itseems appropriate to pause and ask: What have we learned? Here arefour takeaways:

1. Primary insurer pricing power may be slow toreturn.

Most primary insurers reporting Q1 earnings produced ROEs(returns on equity) ranging from the high-single to low-doubledigits. These certainly aren't great numbers, but neither are theyterrible considering the low-interest-rate environment and multipleyears of declining prices.

Therein lies a double-edged swordfor insurers: Returns are generally too low to excite investors,but they are too high to act as a catalyst for a broad-based changein pricing. Absent a credible threat from inflationary pressures orother visible cost-of-goods-sold measures, such as risingreinsurance costs, most policyholders seem likely to resistattempts to materially increase insurance rates.

Perhaps, instead of trumpeting their higher, often-timesdouble-digit calendar-year ROEs, insurers' longer-term interestwould be better served by issuing earnings reports with headlinessuch as: “ABC Insurance Co. Reports a 7% Accident Year 2011 ROE;Company Fails To Earn Its Cost Of Capital.”

Headlines like this might cause some industry observers toscratch their heads, but the astute reader would realize thatprices in the aggregate cannot remain at current levels forever.(Editor's Note: Accident-year ROEs do not benefit from prior-yearreserve releases that push reported calendar-year ROEs to higherlevels.)

2. Reinsurance and primary worlds temporarilydisconnect.

Reinsurers had their clocks cleaned in Q1 2011, with manyexpected to report 5-10 percent (or greater) declines in book valuefrom the beginning of the year. With low operating leverage, lowinterest rates and now massive underwriting losses, the catalystfor change has arrived. Or has it?

While declines were substantial and unexpected—since Q1catastrophes were highly unusual, particularly in combination—noone event was unimaginable. Moreover, unless or until the string ofcatastrophes moves from an earnings event to meaningfully affectyear-end capital, reinsurers' pricing power may not gaintraction.

Importantly, primary insurers are not without options.Retentions can be raised and increasingly liquid alternativereinsurance structures can be tapped (e.g., catastrophe bonds).This is not to say prices shouldn't or won't rise, but themagnitude and the pace of change could disappoint enthusiasticinvestors.

3. Audit premiums pass an inflection point. Does itmatter?

Early indications suggest that Q1 2011 will continue the nascenttrend of insurers reporting positive audit premiums. Cautiousbusinesses have learned to report flat-to-down estimated exposures(sales, autos, payrolls, etc.) although the gradual economicrecovery is producing, on average, small but positive growth.

Here, too, investors would be well served to remember the “freelunch” expression (as in, “there is no…”) because while higherauditable exposures lead to upward revisions to premiums, therevisions also reveal that exposure to loss was higher during thepolicy period than was initially understood. If the business wasproperly priced, then more—or positive—audit premium could verywell be a negative for insurers.

4. Busting the cycle myth.

If there were a “Myth-Busters” team to tackle the generalperception that there is one, monolithic pricing cycle in which allparticipants are price-takers, Travelers—which reported a positivebump of 30 percent in net Q1 income (see chart)—would likelypresent itself as “Exhibit One” to the contrary. The company's Q1statistics highlighted positive renewal-rate changes on two-thirdsof its guaranteed-cost, commercial accounts.

With most companies still grumbling about the soft primarymarket, this begs the question: Can scale and superior analyticaltools be combined with massive amounts of internal data and anactive pricing and segmentation strategy to create a sustainablecompetitive advantage?

It seems clear how Travelers would respond, but the Myth-Bustersteam might require further evidence before declaring the cycle mythbusted. Nevertheless, the competitive challenges facing insurerslacking either scale or true underwriting specialties are onlygoing in one direction—higher!