A.M. Best advises caution, despite strong 2006 profits

Rates for catastrophe-prone areas in the U.S. will remain elevated, despite the limited catastrophe losses in 2006, reflecting conservative pricing, reduced capacity for certain segments and higher reinsurance costs, says A.M. Best’s 2007 Property/Casualty Review/Preview.A soft market prevailed in most other lines and segments, A.M. Best reports, with a gradual release of the tight knot previously surrounding terms and conditions.”Still, underwriting is expected to remain generally prudent, despite these early indications of potential future problems,” a release from the company says.New capacity has entered the market and is also placing more demands on profitability targets, the release adds.While many insurers are looking for increased protection through traditional reinsurance, many are also looking at alternative sources such as catastrophe bonds, industry loss warranties and sidecars, the report found. Carriers reported record-setting results: not only was an underwriting profit achieved, but the combined ratio fell to its lowest level since 1953. But, “it would be nave to think these exceptionally strong results will continue in 2007 and beyond,” caution the report authors.In the volatile and cyclical property/casualty industry, “another devastating event is sure to come.”It may be terrorism, a natural catastrophe, a stock market crash, under-reserving or simply undisciplined underwriting.”