Leading insurance economist Dr. Robert Hartwig has predicted that the coming year will see insurers - including Bermuda insurers - claim significant underwriting losses but with the upshot that the current hard market of increasing prices will continue through next year.

Dr. Hartwig has previously praised the Island's insurers for providing much needed capacity in the current market, but cautiously predicted a 15 percent gain in net written premium growth for the sector in 2002.

Dr. Hartwig, chief economist for the Insurance Information Institute in New York, said: "The industry is still coming to terms with the sins of the past and the cost drivers of the future, as the deteriorating fundamentals vividly reveal.

"Restoring rate adequacy - which includes a reasonable profit provision - and underwriting discipline is a process that will take years. For this reason, significant underwriting losses can be expected for many insurers through 2002.

As a result, there is every reason to believe that the current hard market will remain intact through 2003." Dr. Hartwig was speaking after an insurance study revealed the property and casualty insurance industry reported a statutory rate of return of negative 2.7percent last year, down from a 6.5 percent return in 2000.

The study was carried out by Insurance Services Office and the National Association of Independent Insurers.

Dr. Hartwig attributed the year's poor results to a variety of reasons including "chronic" underpricing, economic downturn, catastrophe losses, medical cost inflation, Enron, abuses of the legal system and the September 11 terrorist attacks.

Speaking further on the need for tighter underwriting, Dr. Hartwig said: "The cost of managing risk for US corporations plummeted by 42 percent between 1992 and 2000."

He continued: "While some of the decrease in the cost of commercial insurance over this period was justified in light of improved fundamentals at some point the pricing and underwriting cart got ahead of the horse."

Dr. Hartwig said that insurers continued to do well, for a time, through investment returns: "For a time, a bull market in both stocks and bonds kept the cart reasonably close, but when the investments faltered and fundamentals once again began to deteriorate, the full impact of years worth of chronically underpriced business left the insurance horse with years of catching up to do."

As illustration of the magnitude of underwriting loss, Dr. Hartwig said the losses soared by 85.4 percent last year, to $23.3 billion, over the previous year.

Dr. Hartwig added the losses were "in large part due to the chronic underpricing and lax underwriting of the 1990s.

"While the September 11 terrorist attack also contributed significantly to the increase, it is important to note that statutory underwriting losses were already up 55.4 percent through the first half of 2001 - well before the attacks occurred," he said.

Looking forward, while predicting underwriting losses in 2002, Dr. Hartwig said analysts are estimating a 14.7 percent net written premium growth for 2002.

He concluded: "The increases in premiums written will be recorded in 2002 and earned in late 2002 and into 2003 - and will be nowhere near the triple-digit figures so commonly cited in the media."