Fitch Ratings says that, barring a rash of catastrophic lossesor an increase in inflation, the property and casualty insuranceindustry should remain stable into 2013.

In a report, “2013 Outlook: Property/Casualty Insurance,” theratings agency paints a positive picture for the industry overall.The outlook is for both U.S. commercial and personal lines.

After years of a prolonged soft market and dealing withthe economic downturn, Fitch says, “The market capital positionremains strong” and the carriers the firm rates “have sufficientcapital to meet significant future adversity.”

Among the positives, surplus levels “remain at historic highlevels” and capital adequacy remains “very strong.” This is helpedby “investment emphasis on high-quality and liquid bonds, adequateloss reserves….”

Fitch notes that insurance rates have been on the increase inboth commercial and personal lines and the “trend is likely tocontinue at least through late 2013.”

Fitch believes “this is a hardening market, in contrast to ahard market where rates are at a level consistent with returns ator above required rates of return on capital.”

A turn to a truly hard market is “questionable” in the nearfuture, Fitch says, as pricing is in “response to losses that willeventually be overwhelmed by competitive forces.”

Competition, the rating service says, “will return the market toflat or declining rates before any hard market transpires.”

Fitch says its outlook could change if catastrophes reducesurplus by more than 20 percent. The rating outlook could also turnnegative if there is deterioration in accident-year underwritinglosses that reduces capital.

An increase in inflation could raise loss costs, promotinghigher loss ratios and reserve deficiencies, says Fitch.

Assuming “an average year for catastrophe-related losses,” theindustry could experience “a very modest underwriting profit in2013,” says Fitch.

However, looking further ahead, the combination of the “inherentvolatility” of the insurance business and the competitive nature ofcarriers could make it difficult for insurers to boost returns in2014 and beyond.