NEW YORK-Despite rising rates and improved profits, the property/casualty insurance industry's prospects are clouded by concerns about reserve deficiencies, unrecoverable reinsurance and the duration of the hard market, industry observers say.

Substantial rate increases in virtually all lines but property will produce a roughly 14% increase in the industry's premium volume this year, with the increase slowing to the high single digits or low double digits next year, predicted John Iten, a director with Standard & Poor's Corp. in New York.

More restrictive terms and conditions will also favor insurers, Mr. Iten told an audience at an S&P conference, "Insurance 2003: Are Better Times Ahead?" in New York last week.

For a variety of reasons ranging from asbestos exposure to the possible return of market competition, the property/casualty insurance industry's outlook is not rosy, Mr. Iten said at the meeting.

In the past 12 months, S&P has downgraded ratings of 23 primary property/casualty insurers while upgrading none. Sixteen of the 23 received single-notch downgrades, including such large property/casualty companies as Allianz of America Inc., Chubb Corp. and Hartford Financial Services Group Inc.

The ratings outlook for commercial insurers continues to deteriorate, Mr. Iten noted. Twenty-one commercial insurers currently have "stable" ratings outlooks from S&P, compared with 27 a year ago, while 21 insurers carry "negative" outlooks, up from 17 a year ago.

One area of concern, he observed, is the possibility that rate competition could return to the market, eroding gains insurers have made in the tighter market. Property insurance pricing has already peaked, and further increases are needed in casualty lines to outpace loss costs, he suggested.

The need for underwriting profits is underscored by plummeting investment returns, Mr. Iten added. Insurance companies can expect "no help from their fixed-income portfolios," he said.

Meanwhile, reserve deficiencies for asbestos and other losses have led to huge charges against earnings for several insurers in recent months, including multibillion-dollar charges for reserve additions by Hartford, Travelers Property/Casualty Corp. and ACE Ltd.

Gross asbestos reserves for a group of 13 large property/casualty insurers tracked by S&P are $25.73 billion currently, up 87% since 2001, according to S&P. The current level includes Hartford's first-quarter 2003 increase of $3.91 billion.

While announcing big gross reserve increases, the 13 insurers also reported that 45% of their expected losses will be recoverable from reinsurers.

"There is a very large difference between the gross reserves and the net reserves for the industry," Mr. Iten noted.

This, in turn, has created rising concern about the willingness and ability of reinsurers to pay, he said. Among the issues still to be determined are the extent to which reinsurers have recognized their liabilities-particularly for incurred-but-not-reported losses-and the extent to which primary insurers have properly reserved or made capital adjustments for uncollectible reinsurance.

Along with asbestos exposures, insurers are facing big problems with certain lines of business, Mr. Iten added. These include workers compensation, where the industry is still recovering from years of underpricing and underreserving and faces the potential threat of massive terrorism losses; and directors and officers liability insurance, where corporate fraud and the bursting of the stock market bubble have led to huge increases in shareholder litigation.

Insurers shouldn't hold their breath waiting for Congress to solve the asbestos crisis, executives on another panel at the S&P conference suggested.

Ramani Ayer, Hartford's chief executive officer, predicted that the proposed Fairness in Asbestos Resolution Act-which would create a $108 billion federal trust fund to handle all asbestos claims-has only a 1-in-4 chance of being enacted.

American International Group Inc. Chairman and CEO Maurice R. Greenberg-who has worked with Mr. Ayer and other industry officials in negotiating the bill's terms-was similarly downbeat.

Mr. Greenberg said he is more optimistic about tort reform on the state level, where AIG has threatened to stop investing in bonds issued by states with high tort costs and poor tort reform records.

"Why should we buy their municipal bonds if they are going to discriminate against insurers and take them to the cleaners?" Mr. Greenberg said.