The outlook adds, “In such an environment, we expect operating results to diverge widely in the industry and that stock performance will follow.”

As for the factors at play in the current market, KBW says reserve releases are slowing, investment yields are dropping and underlying loss ratios are deteriorating. These factors are offset by only modest rate increases. As such, KBW says it expects the industry's return on equity and earnings outlook to remain weak.

KBW says, “Winners will be those with reserve and capital strength who strategically are well positioned for a quickly evolving market.” The firm says its top picks include AXIS Capital Holdings and Allied World Assurance Company, in addition to large global brokers.

The KBW outlook's mixed description of where the market is heading comes as other observers also try to make sense of the pricing environment.

W.R. Berkley CEO William R. Berkley said last week at the Goldman Sachs US Financial Services Conference 2011 that the insurance industry is now “definitively in a hardening market,” adding that the industry is “just at the beginning of price increases.”

A report by broker Willis last week said the market may not be turning yet as the industry remains well capitalized and has not seen a “game-changing” event that would cause a turn. Willis also noted that if the economy dips into another recession, the resulting lack of demand for insurance products could put the brakes on insurers' efforts to pursue rate increases.

At the 22nd Annual Executive Conference produced by The National Underwriter Co. and Summit Business Media, Chartis Chief Executive Officer of Global-Commercial business John Q. Doyle said the industry's use of better tools to assess risk and allocate capital might bring about the end of traditional market cycles altogether. Doyle said the industry might instead see shorter, flatter “micro cycles” going forward.

Analyst firm ALIRT Insurance Research waded into the issue shortly afterward, stating that human nature would likely preserve the traditional pricing cycle. “So long as we, by nature, look to satisfy short-term desires at the expense of longer-term goals, a pronounced market cycle—at least in the commercial-line market—will likely persist,” ALIRT said in its P&C review late last week.