More insurance companies are likely to collapse in the coming months and that will drive premiums higher, XL Capital president and chief executive officer Brian O'Hara said yesterday.

Mr. O'Hara, speaking on a panel at the Association of Insurance and Financial Analyst's conference in Scottsdale, Arizona, said the current insurance cycle is a "work in progress".

Insurance rates have risen dramatically since the September 11, 2001 terrorism attacks, reversing years of low rates.

In spite of that, some insurance companies are struggling and paying the price for years of previous poor underwriting, Mr. O'Hara said.

If more insurance companies collapse, that should fuel tighter and harder market conditions by the industry, he said.

Dow Jones Newswires reported that he pointed to Kemper Insurance Cos.' recent problems, including decisions to sell renewal rates for a number of businesses to other companies.

Mr. O'Hara said insurers focused too much on satisfying their customers and gaining market share in the late 1990s, rather than underwriting. That's what has led to the many problems and reserve additions the industry is experiencing today.

Stephen Lilienthal, chairman and chief executive officer of the insurance companies of CNA Financial Inc. (CNA), said rates are likely to remain firm in part due to continued economic pressure and less capacity, or available insurance, in the marketplace.

The industry also is likely to face more external pressure from regulators, rating agencies and auditors when it comes to available capital, he said.

Meanwhile, Mr. Lillenthal said asbestos will likely continue to be a distraction for the industry - whether it's a global settlement or a large case that weighs on the industry.

The workers compensation market will continue to deteriorate, particularly in California, Mr. Lillenthal said.

Mr. Lillenthal noted the business line is a necessary part of the landscape and should be a significant part of the portfolio at most large commercial insurers. Lillenthal said he would ultimately like it to be about 14 percent to 15 percent of CNA's business.

Mr. O'Hara said workers compensation is not an area the Bermuda insurer feels very comfortable operating in, saying it is daunted by any line that is highly regulated.

It's not likely that regulators will approve the rates needed by workers-compensation writers to generate appropriate return on risk, O'Hara said. Returns-on-equity in workers compensation are much lower than other lines of business, so insurers are likely to commit their capital to other areas, he said.

Mr. Lillenthal also said something has to give on medical malpractice. It's a segment that CNA moved out of some time ago, he said.

For an insurer to operate in that business, they must have a "very, very smart group of underwriters and lawyers and claims adjusters". Lillenthal said. He described the current environment as playing with nitroglycerin, Dow Jones reported.

On a federal backstop for terrorism insurance, Lillenthal said it's nice to have, but the issue of terrorism coverage wasn't resolved by the legislation. It begs further solution, but he fears the industry will still be seeking a solution when the law expires in three years.