Marsh & McLennan Cos. chief executive Brian Duperreault believes the insurance industry is entering an "invisible hard market" that will see rates rise but the value of insured exposures fall.

The Bermudian former CEO of Ace Ltd. told an an Association of Professional Insurance Women luncheon last week that the hard market would evolve differently from any the industry had seen in the last half a century following huge losses on the financial markets.

He said the coming year would see premium rates rising, while, at the same time, underlying exposures decline in many lines, he said.

Typically this means a better relationship between pricing and exposure, "but it may not produce a meaningful change in the top line," he said.

As a result, insurers will not see a dramatic change in their underwriting income, he said. And conditions may not translate immediately into an improved bottom line, either, he said.

"Couple that with continuing declines in investment income, and the insurance industry will likely report flat or only modest gains in total income. It will not be obvious that although earnings are little changed, companies are actually performing much better," he said.

Other typical aspects of a hardening market, including stock appreciation and greater access to capital, are also unlikely to be evident at first, he said.

The environment represents an enormous challenge for the industry, and despite signs of a hardening market, "we will have to manage with a soft market mentality," because "the instant gratification that usually accompanies a hard market won't be there at first."

To combat the slow improvements, insurers will have to continue to evaluate expenses and employ rigorous underwriting discipline and claims management processes, he said.