Industry surplus is at an all-time high, underwriting andoperating profitability are solid and catastrophe losses have beenrelatively benign over the past two years, according to ALIRTInsurance Research.

Why, then, the firm wonders, has the industry not entered asoft-market cycle? “Have the laws of supply and demand, as appliedto U.S. property and casualty pricing, been suspended?” ALIRT asks.“One would not be faulted for thinking so.”

ALIRT attempts to answer the question, first noting thatinsurers have pointed to the need for higher rates to offset weakportfolio yields. However, ALIRT notes that many insurers continueto make “historically strong operating gains.”

ALIRT proposes a different reason: “A bigger problem forpublicly traded firms is, in fact, the amount of capital they aregenerating. Higher capital positions make achieving target ROEsmore difficult. With the denominator going up, so must thenumerator—and thus the plea for higher pricing.”

The firm says that, should underwriting results continue to bestrong, buyers might eventually vote with their pocketbooks anddemand that target ROEs be adjusted lower.

Some insurers, ALIRT says, point to more volatile weatherpatterns as a reason for increased rates. “The Travelers Companies,Inc. has been particularly vocal about this,” ALIRT notes. Here,ALIRT explains, insurers argue that the greater incidence of large“shock losses” call for the establishment of higher reserves. “So,in essence, companies are charging higher premiums which are beingset aside for a rainy day, literally,” ALIRT says.

Digging a bit deeper, ALIRT says it looked at the change in real(inflation-adjusted) value of $100 of premium over the past 15years, using a series of broker surveys to determine year-to-yearpercentage changes in the broad industry rate.

The firm finds that, in 2011, about when broad rates began tofirm, “$100 of premium had fallen to 1999 levels on a real-dollarbasis.” ALIRT notes that 1999 pricing was in the midst of a deepsoftening phase, “and hence, ultimately inadequate, it makes sensethat pricing would make a bounce off of this level.”

But with inflation and loss-cost growth at belowlong-term-average rates and with reserve redundancy continuing,ALIRT says it is “difficult to make the case that additional rateis needed—from an underwriting perspective, anyway.”

ALIRT also says reserve releases have been relatively steady forthe past five years for both commercial and personal lines, with nodiscernible trend toward deficiencies, “again suggesting thatpricing will not get an immediate lift from fear of reserveinadequacy.”

The firm does note, though, that in future yearscommercial-lines writers may exhaust their reserve redundancies asthe most recent accident years (2010-2012) are developing atbreak-even. “Interestingly, there appears to be no such trend withthe personal-lines predominant companies,” ALIRT says.

ALIRT bases its data on the 2013 nine-month results of the ALIRTP&C Composite, consisting of the 50 largest U.S. P&Cinsurers, excluding professional reinsurers.