Risk managers likely will see favorable market conditions for most U.S. commercial property/casualty insurance lines again this year, according to a report Marsh Inc. plans to release this week.

Insurers, though, likely face challenges as the investment outlook will force them to focus on underwriting profitability, the report says.

“Intense competition among insurers, increased capacity and fewer insured catastrophe losses all played key roles in keeping U.S. insurance markets generally stable in 2009 "and are poised to do so again in 2010,” according to the Marsh report.

For example, strong competition among casualty insurers likely will continue because insurers are moderately overcapitalized, according to the 120-page U.S. Insurance Market Report 2010.

On the property side, barring a large catastrophe, insurance buyers likely will see more decreases than increases this year as property markets continue to stabilize, the report said.

“Firms with minimal to no cat exposure should expect higher levels of competition among insurers and rate changes generally ranging from 5% decreases to 5% increases,” the report states. “Companies with moderate to high cat exposure, on the other hand, likely will see higher average rate increases, generally from flat to 10%.”

Directors and officers liability insurance will remain competitive, assuming economic and litigation environments remain relatively stable, while employment practices liability insurance continues to see abundant capacity, the report says.

The expectations for 2010 stem from developments in 2009.

Property coverage renewals during the fourth quarter typically saw rates ranging from 2.5% increases to 5% decreases along with improved terms and conditions and possibly reduced deductibles, the Marsh report states.

Buyers with more than 30% of their values in catastrophe-exposed regions saw rates ranging from 5% increases to 5% decreases.

Competition in casualty lines in 2009 was driven by insurers chasing new business in attempts to offset premiums lost due to clients' decreasing exposures, according to Marsh.

Coverage enhancements for some lines also were evident in 2009. Some employment practices liability insurers, for example, provided defense costs for wage-and-hour lawsuits, which previously had been excluded.

Based on earnings reports for the first nine months of 2009, Marsh also found that insurer profitability improved during the latter part of the year, although soft market conditions for commercial lines policies and investment returns remain a challenge for insurers. However, some investment markets recently have improved.

Profits for the U.S. property/ casualty industry partially recovered from a “steep decline” in 2008 with net income reaching $16.6 billion through the third quarter of 2009.

“While profitability remains on the low side, signs of improvement were being seen in the second half of the year,” Marsh said. “Overall profitability as measured by the rate of return on average equity improved to 4.8% for the first nine months of 2009 compared to 1.3% one year earlier.”

The industry's combined ratio during the first nine months of 2009 reached 101.2%, which is a 4.6 point improvement from the same period of 2008.

“Although this compares favorably to the prior year, insurers will need to post significantly better underwriting results if they are to return to levels of profitability they have seen in the past,” the Marsh report adds.

With low investment yields, the industry's net investment income fell 7% to $36.4 billion for the first nine months of the year compared with the same period last year.

But third quarter results represented a significant improvement and show investment improvements.

“Overall, the (property/casualty) insurance industry remains quite strong, both financially and fundamentally,” Marsh said. “2010 begins with guarded optimism about the economy as financial markets continue to stabilize. Although insurers' profitability in 2010 may equal or exceed 2009 levels, it is important to be aware that the investment world is extremely volatile and that large-scale catastrophic events can change the outlook for the insurance industry quickly and dramatically.”

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