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

Moving forward, earnings on casualty business in 2011 and beyond will "cease to benefit from favorable legacy reserve development." Those p&c insurers who have written underpriced business will recognize 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 offering broader terms and conditions in lieu of increasing price in order to keep market share. This practice, Moody's said, could have long-term negative impact and "is potentially more problematic than rate inadequacy" because it is difficult to understand the full impact those changes can have on a company due to "reduced transparency."

Moody's said, "We believe the sector is offering greater capacity than demand can absorb, and the medium-term outlook doesn't look promising" given the loss in insurance premium demand from the economic downturn.

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

Pano Karambelas, vice president-senior credit officer for Moody's, told NU Online News Service that "no one knows how long this is going to take" before the soft market sees a turnaround. He said the current soft market reflects the historic pricing cycle and the report is a reflection on insurers' profitability into the future.