NU Online News Service, Oct. 29, 3:35 p.m. EDT

The current soft market in the commercial insurance markets is unsustainable in the long-term, but hardening of insurance prices will only be seen when insurers and reinsurers start to significantly eat into capital reserves, according to an insurance broker's report.

Kansas City, Mo.--based insurance broker Lockton issued its fall 2010 market report saying that buyers continue to have the advantage in a property and casualty market that remains soft.

"The rate of pricing decline has slowed, but in most cases, buyers can expect a favorable pricing environment will continue for the immediate future," the report said.

In a strong positive, the report said that a number of financial measurements indicate that the property market will "enter the 2011 term on very strong footing."

At the same time, the report said that there is "scant sign" yet of firming prices in the casualty market.

The report noted that "with interest rates remaining resolutely low, there is some suggestion that insurers may be leaning a little heavily on releases of past-year reserves to shore up their results."

In the commercial property sector, rates have been in a "free fall" for much of 2010 as abundant capacity and the lack of any significant catastrophe losses in North America in the second and third quarters have encouraged aggressive competition.

The report said the reinsurance markets continue to be "at a crossroads" in the pricing cycle.

The direct market remains soft, eroding the rating base for reinsurers, the report said.

"At the same time, there is no contraction in terms of reinsurance supply," the report said.

"At the base of the pyramid is the direct customer, who is cash-strapped and looking to save any money they can, often retaining more risk," the report said.

In one negative, the report said some reinsurers are already reporting negative results for the first half of the year. "Their books are only being balanced by loss reserve releases and realized investment gains," the report said.

In comments about the turbulent energy market, the report quotes David Way, Lockton executive director in London, as saying that the Deepwater Horizon disaster fundamentally changed the view of insurers regarding risks in that sector.

He said that before the Deepwater Horizon disaster, capacity across most areas of the energy sector was at record levels in early 2010, and rates were highly competitive.

"The obvious change is the offshore market, where the Deepwater Horizon explosion and subsequent oil spill has prompted insurers to adopt a much more cautious approach to similar risks."

John Rathmell, president of Lockton Marine & Energy in Houston said, "As the energy sector prepares for the reinsurance renewals and the next big renewal season between February and July, the BP disaster will have an effect on the renewals."

Mr. Rathmell added that "those accounts that renewed before the BP disaster could expect to see some rate increases this year."

He said that in the immediate aftermath of the Macondo blowout, rates increased about 15 percent to 25 percent.

"By the time those early accounts renew in 2011, rate increases may moderate somewhat but are still likely to be up compared to last year," he observed.