Will the bubble burst in 2007?

The bumper set of results for UK insurancers reveals that 2006 was a highly successful year for the industry. Underwriting profits soared and some insurers, such as Allianz Cornhill, even managed to increase their volume of business without sacrificing returns.

And this in the face of competitive market conditions, which have eaten away at rates in many lines of business.

But can this performance continue? Will the market be toasting similar record results next year? Many think not.

Senior insurance industry executives warn that the market will begin to feel the pinch this year as the soft market begins to take its toll on results.

Andrew Torrance, Allianz Cornhill's chief executive, said recently that he would "not be surprised if there was a move downward in terms of reported profit levels across the market in 2007".

Equally, Groupama managing director François-Xavier Boisseau also painted a bleak picture of the market's future. "2007 will see lower profits. In 2008 the pain will happen," he said.

The problem for insurers is the soft state of the commercial insurance market. Norwich Union reported that commercial property and liability rates fell by 3% in 2006. Mean-while, Royal & SunAlliance (R&SA) said its liability rates fell by 9% in 2006, with property rates falling by 4%.

Anecdotal evidence from brokers suggest that in some cases insurers have been prepared to slash premiums by over 50% to keep good business.

For the most part, the competitive rating environment has yet to take its toll on insurers' performance. Norwich Union, for instance, saw its commercial lines underwriting profit increase by 32% in 2006, with only commercial motor taking a dip in profitability.

R&SA suffered a slight downturn in its commercial lines underwriting result, mainly due to a £39m increase in asbestos reserves and a deterioration in the profitability of its commercial motor book.

Nonetheless the company still turned in an underwriting profit of £95m.

Softening rates
But 2007's results could be less rosy as the months of softening rates begin to feed through into bottom line performance.

This effect can be seen in the private motor books of many of the major insurers, where years of fierce competition has left them languishing in the red and struggling to get out.

Boisseau argues that the soft commercial rates will begin to "crystallise" in companies' results this year, hitting profits.

How long this lasts will depend on how soon rates begin to turn. The motor market, for instance, has been slow to respond to poor performance. It is only now beginning to show the green shoots of recovery, despite the fact that the market has not made a profit since 1994.

Torrance indicates that insurers will respond more quickly than the motor market and not slide into a loss making situation. "People will react when they are failing to make the kind of returns their shareholders require," he said.

"In the past they would wait until they made a loss before responding. Now they are a lot more disciplined."

Whether that discipline and consequent rates rises begin to show through this year, next year or in 2009 is not clear, with predictions differing widely.

What is clear, is that insurers' half-year results will be examined closely for indications of how painful 2007 may prove to be. IT