SAN DIEGO-The insurance industry remains tumultuous as insurers grapple with a host of problems.

Among the factors causing turbulence in the market are escalating tort costs, reserve deficiencies, reinsurance market difficulties and weakened balance sheets, according to a panel of insurer executives.

In addition, continued dismal investment returns and the threat of terrorism remain key concerns, the executives said at a discussion held at the annual meeting of the National Assn. of Professional Surplus Lines Offices Ltd.

As a result of these factors, a return to soft market conditions is unlikely in the near future.

"Long story short-in my view, we are not moving today from a hard market to a soft market," said Jeff Post, president and chief executive officer for Fireman's Fund Insurance Co. in Novato, Calif. "We are moving today from a hard market to a confused market, and it's a confused market because we still have a lot of things we have to fix as an industry."

Reserve adequacy is one problem area, Mr. Post said during the panel discussion.

According to rating agency A.M. Best Co., insurers providing coverages aside from environmental and asbestos are underreserved by 10%, Mr. Post said. And environmental and asbestos insurers are underreserved by a further 10%, he noted.

"That clearly means this industry today, along with other problems, has overstated surplus," Mr. Post said. "That is why companies continue to get downgraded, because, at the end of the day, they still have unrealized losses that have not yet flowed through their income statements and balance sheets."

Various reports place property/ casualty reserve deficiencies at $40 billion to $120 billion, said James S. Carey, president and CEO of Admiral Insurance Co. in Cherry Hill, N.J.

"If that high number is correct, it's a scary situation," he said. Furthermore, Mr. Carey noted, the industry's surplus is down $50 billion in just the past two years.

In addition, Mr. Post said, "rating agencies do not like our industry today."

"It may come to a day when a B+ rated insurance company is actually a good quality credit," he said. "We see that today on the reinsurance side. There are just not that many good quality reinsurers left, and I'm afraid if we don't make some adequate returns in the short term, that could also happen on the primary side."

Given such factors, it is cause for concern that "we are starting to see some softening in some lines of business," Mr. Post said.

The rising cost of lawsuits is a key concern for the insurance industry, said Kevin H. Kelley, chairman and CEO of Boston-based Lexington Insurance Co. Total tort costs in the United States are projected to reach $300 billion in 2005, he said.

Tort costs rose by about 14% in 2000 and 2001, Mr. Kelley said. He acknowledged that tort costs had increased at a rate of 15% to 16% during the mid-1980s but noted that, at the time, high investment returns could counter such "loss-cost inflation."

Today's situation is very different, though, with investment returns trailing rising tort costs.

"The only way you can fund for that gap...is through rate increases, and any executive who doesn't recognize that probably won't be in their position for very long," he said.

Unanticipated and long-tail liability losses also continue to plague insurers and reinsurers, said Michele P. Bernal, chief actuarial officer and vp for American Re-Insurance Co. in Princeton, N.J.

For example, she said, few in the industry would have expected that an event such as the Sept. 11, 2001, attacks could affect so many lines of business or that corporate restatements would lead to widespread losses.

"We (in the industry) are certainly a lot better off from where we were a couple of years ago; we are starting to feel a little healthier. But we are still weak, and we are really going to need to continue to push on the hard market to be able to continue to recuperate," she said.

Even in property insurance-a line in which some NAPSLO conference attendees say they have seen prices begin to weaken-there are dangers of price hikes returning, some of the panelists said.

They pointed to forecasts for a robust hurricane season, noting that Hurricane Isabel was, as they spoke, swirling east of the Caribbean.

"If that were to hit a populated area of the U.S., I would guarantee that any softening you might see on the property side of the market would bounce back rather quickly," Mr. Carey said.

Increased insurer consolidation also is possible-particularly in two or three years-potentially creating "distraction and havoc" in the market, Mr. Kelley said.

That potential exists because of the significant disparity in the size of insurers, he said, noting that the top two insurers have considerably greater market capitalization than the combined market capitalization of the next eight largest companies.

For buyers, though, such a scenario can result in upward pricing pressure, Mr. Kelley said in an interview after the panel presentation.

L.M. Wesson Jr., president and chief operating officer of U.S. Risk Insurance Group Inc. in Dallas, moderated the panel discussion.