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

The continuing soft market is weakening the credit quality ofproperty 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 saidthe latest Council of Insurance Agents and Brokers survey underscores thecontinuing soft market that the industry is suffering through.Average premium rate declines since the third quarter of last yearstand in excess of 5 percent. During the second quarter of thisyear insurance brokers surveyed said rate declines averaged morethan 6 percent.

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

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

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

Moving forward, earnings on casualty business in 2011 and beyondwill "cease to benefit from favorable legacy reserve development."Those p&c insurers who have written underpriced business willrecognize 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 offeringbroader terms and conditions in lieu of increasing price in orderto keep market share. This practice, Moody's said, could havelong-term negative impact and "is potentially more problematic thanrate inadequacy" because it is difficult to understand the fullimpact those changes can have on a company due to "reducedtransparency."

Moody's said, "We believe the sector is offering greatercapacity than demand can absorb, and the medium-term outlookdoesn't look promising" given the loss in insurance premium demandfrom the economic downturn.

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

Pano Karambelas, vice president-senior credit officer forMoody's, told NU Online News Service that "no one knows how longthis is going to take" before the soft market sees a turnaround. Hesaid the current soft market reflects the historic pricing cycleand the report is a reflection on insurers' profitability into thefuture.