Over and over again, one word prevails indiscussions about rate increases in 2013: modest.

Throughout 2012, P&C carriers benefitted from low- tomid-single-digit price increases in all commercial and personallines—and it appears as though that trend will carry over into thenew year.

“We expect the 2013 operating environment for P&C insurersto be pretty much the same as what we've seen in 2012: modest rateincreases,” say insurance-industry analysts at Keefe, Bruyette& Woods.

The current trend of incremental P&C rate increases “islikely to continue at least through late 2013,” declares FitchRatings.

This moderate level of growth, while perhaps less than whatcarriers would desire, has a number of positives. For one, itcertainly beats the years of soft, inadequate pricing prior to theslow turn upward in rates during 2012. Plus, a gradual market shiftallows buyers to adjust to the changing environment with none ofthe painful sticker shock that typically afflicts insureds inhardening markets. 

Or, as Marla Donovan, vice president of product development atinsurance wholesaler Burns & Wilcox, puts it: “The market is assane as any of us can remember it being. The 'panic' is notthere.” 

STILL UNCLEAR: SANDY'S LONG-TERM IMPACT 

Though catastrophe modelers have prognosticated industry lossesof up to $25 billion from Superstorm Sandy, each public insurerannouncing individual losses to investors prior to fourth-quarterearnings announcements warned of significant unknowns in theirultimate Sandy-loss estimations. 

“Everyone is waiting to see the true impact” Sandy will have,says Donovan. 

Richard Kerr, CEO of insurance exchange MarketScout, saysProperty increases may pick up, particularly for CatastropheExposed Property. 

Prior to Sandy, Property insurance   already was amongthe lines seeing the most consistent rate increases in 2012, withloss costs generally being met, says Robert Hartwig, president ofthe Insurance Information Institute. But he believes the size ofrate increases for personal and commercial properties won't changepost-Sandy.

“The moderate momentum will continue in 2013,” says Hartwig,pointing out that while global catastrophe losses may have droppedin 2012 (compared to 2011, which had earthquakes in Japan and NewZealand, the subsequent tsunami in Japan, and flooding inThailand), U.S. catastrophe losses will end up close to levels in2011—thanks to the late-October superstorm. 

As of late December, two months after Sandy made landfall, therehas been no clear evidence of a change in underwriting positionswith regard to writing Property risks, according to Greg Di Prato,senior vice president in Lockton's Global PropertyPractice. 

Adds broker Marsh: “Sandy's full impact on Property insurancemarkets likely will be felt in the first half of 2013, withinsurers expected to be less agreeable to rate decreases and totighten policy wordings around flood, storm surge andwindstorm.” 

Many industry analysts and experts have remarked that Sandywon't be a market-changing event, as industry surplus in theprimary insurance market before the huge Northeast storm was at anear-record level. 

Similarly, the reinsurance market is well-capitalized and canmanage losses from Sandy and still have enough availablereinsurance capacity to exceed demand in 2013. 

Still, reinsurance broker Guy Carpenter says it did not expect aclear picture of Sandy's loss impact on insurers to be availablebefore Jan. 1 renewals—“a level of uncertainty that may enter intoreinsurance negotiations,” the company notes. 

Like many carriers in the primary market, Guy Carpenter viewsSandy as an event “that will likely take months to fully sortthrough” because losses from the storm, such as those for BusinessInterruption, are so complex. 

RENEWED FOCUS ON UNDERWRITING PROFITABILITY

Another factor that continues to put pressure on pricing: Lowinterest rates continue to affect the market by weakeninginvestment returns.

The Federal Reserve has linked interest rates to the level ofunemployment, stating that interest rates aren't going to riseuntil unemployment falls below 6.5 percent or until inflation risesabove 2.5 percent. Neither will happen in the immediate future,Hartwig forecasts. 

“No one believes there will be 6.5 percent unemployment in ayear,” he says. “I'd love to be wrong, but I don't think so.”

Insurers' net investment income fell 4.1 percent to $35.1billion after nine months in 2012, compared to $36.6 billion afternine months in 2011, according to ISO, a Verisk Analytics company,and the Property Casualty Insurers Association of America. 

As investment results fall, carriers will have to fall back onwhat they can control—rates—to hold returns on equity. With that isan expected continued focus on underwriting profit. 

ISO says underwriting profitability would have to improve bymore than 4 percentage points for insurers to earn their long-termaverage rate of return—which explains why so many insurers havemade priorities of solid underwriting and risk-based pricing.

Hartwig expects a modest underwriting loss for the industry in2012, for the second consecutive year. As some companies willsmokescreen these losses with more reserve releases, some analystsexpect favorable prior-year reserve development to wane.

But analysts do predict better underwriting performance in thenear term—though the double-digit returns experienced during thelast hard market are doubtful. 

“Carriers are building an underwriting strategy by line ofbusiness with an emphasis on individual account profitability,”says Tim DeSett, executive vice president and risk practice leaderat Lockton. “Lower investment income yields have put a heavierfocus on pure underwriting profitability.”