Commercial insurance rates are set to climb by late next year, heralding that start of a longer-than-average hard market, according to insurance industry experts Advisen.

That analysis, published in an Advisen report entitled 'The Hard Market is Coming (But Don't Hold Your Breath)', published yesterday, will be welcomed by Bermuda's insurers, who have been battered by the combined effects of hurricane claims and investment losses.

Several Bermuda-based executives have said they expect reinsurance rates to bounce back as soon as next month's renewals.

But, Advisen's research suggests that general commercial insurance rates will not start increasing until the fourth quarter of 2009 or the first quarter of 2010, mainly because of the effects of the economic downturn causing a decline in demand for insurance.

When rates do start to pick up, however, supply may struggle to keep up with the demand, because of the scarcity of available capital for insurance capacity.

"In years past, insurance companies recouped underwriting losses with investment income, but in 2008 the combination of underwriting losses and material investment losses means a five-year soft market is coming to an end," said David Bradford, Advisen's executive vice-president and chief knowledge officer.

"The global recession may delay the return of hard market conditions by keeping demand for insurance down, but once the hard market sets in, it is likely to last longer than was the case in recent cycles.

"In previous hard markets, price increases attracted new capital investment to the market, and the increase in insurance supply led to short hard market cycles.

"In the current economic environment, where credit markets are essentially frozen, capital to create new insurance and reinsurance capacity may be in short supply. With capital scarce, the coming hard market could be longer in duration than those of the past several decades."

Mr. Bradford pointed out that he expected the hard market to develop gradually, in the absence of major catastrophes, which "could trigger sky-rocketing premiums".

Advisen estimates that the property and casualaty industry was overcapitalised by around $100 billion by the end of 2007. Consultants Towers Perrin forecast a decrease in policyholders' surplus - capital supporting underwriting operations - of up to $80 billion by the end of 2008. While this erosion of capital should signal that the soft market is close to its bottom, the global recession will delay the return to higher rates through decreasing demand, as companies look for ways to slash their insurance bills, including a likely increased use of captives, Advisen said.

The struggles of American International Group (AIG), the largest commercial lines insurer in the US, could prolong the soft market, the report suggested, as heightened competition for its clients could keep rates depressed.

Liberty Mutual Group CEO Edmund Kelly said ealier this year that AIG was "doing two very stupid things in the market" to retain market share. Advisen polled 17 commercial lines brokers and found that "AIG apperas to be competing vigorously, but not irresponsibly".

"One broker added that some insurers are so obsessed with winning AIG customers that they, not AIG, are more responsible for cut-throat competition," the report added.

In the past, the start of a hard market had sparked an influx of new capacity, which in turn created increased competition for premiums and choked the hard market. Advisen believes the scenario will be different next time.

"In the current economic environment, however, skittish investors, dysfunctional credit markets and deleveraged hedge funds may mean that much less capital will be available to fund new insurance and reinsurance companies or for investments in alternative sources of capacity," the report stated. "As a result, the coming hard market may last longer than has been typical of past cycles."