Rates are flattening out in some areas of property/casualty but it is too soon to tell if the rates are high enough for the year, according to A.M. Best Co.'s annual Review/Preview report.

And it said that while underwriting improved, with a year-end 2003 combined ratio forecast at 101.1, the property/casualty industry has a long way to go before strong returns can be achieved.

In a report which is issued every year, the ratings agency said that recent improvements in operating performance have been hard fought and "aren't without continued pressures from a variety of fronts". The report, issued yesterday, said that continued underwriting enhancements, cost efficiencies, price monitoring and investment diversification were just a few of the necessary fundamentals to stay ahead.

"The market has waited for the first sustained period of price firming for more than 15 years," said the report.

"While rates in most segments have improved markedly in recent years, they came from a very depressed level, leaving uncertainty for the adequacy of rates even after a series of significant rate actions and underwriting restrictions.

"Rate increases have slowed or have even flattened in some cases, namely in property. However, it's too soon to tell if rates are appropriate. But one thing is certain: the low-interest-rate environment has put more dependence on underwriting results as the principal driver of operating performance."

The report added that reinsurance has contributed to market turns in the past.

"Looser pricing and standards can soften a market, while the inverse can drive it in a more positive direction," it said. "Certainly, pricing and changes in terms and conditions have contributed significantly to the harder market in recent years.

It said that established companies and the "rash" of new start-ups launched after September 11, 2001, had brought more than $16 billion of new capacity. "While these companies have grown over the past two years, it was basically from market disruptions in the United States, London and Europe, and not from the significant undercutting of prices," it said.

"The industry needs to continue to adhere to the stricter underwriting disciplines reintroducedor perhaps introducedover the past two years. By maintaining underwriting fundamentals, the industry can better mitigate the myriad other issues, including weather, investment, inflation, regulatory and political issues."

Some of the trends and issues A.M. Best expects to see in 2004 include:

Prices continuing to increase, as many variables erode the adequacy of pricing, including loss-cost trends, reinsurance costs, interest rates and prior-year reserve development.

Further sizeable reserve actions as more companies move to solidify their balance-sheet strength, given the strong pricing environment.

The spread in the use of ratings trigger clauses by brokers and tougher acceptance guidelines for reinsurers.