Europe’s sovereign debt crisis could have a negative impact on the U.S. property and casualty industry’s ability to change the course of the soft market should the economy fall into another recession, an industry consultant says.

In a commentary on the current state of the insurance marketplace, Charles Ruoff, president of CR Market Strategies Inc., says recessions have historically put a damper on the industry’s ability to “alter the direction of soft market cycles on itsown initiative.”

From 1967 through 2009, periods of recession have dramatically affected pretax operating income, falling as much as 10 percent during the recessionary period.

The rise and fall in operating income has also mirrored the U.S. gross domestic product, rising and falling almost in tandem over the same period.

The spending on U.S. commercial insurance “is directly influenced by economic conditions as commercial and institutional buyers will adjust risk retention/transfer decisions in direct relation to economic realities and outlook,” Ruoff notes.

There remains excess capital in the foreign reinsurance markets and in the United States. Despite an unusually active global catastrophe year, insured losses were “widely spread” making capital reductions modest and “not market-turning events,” he points out. The result, outside of specific loss related events, pricing has not seen a general run-up.

“The largest global reinsures are on track to good earnings in 2011, despite the catastrophe losses,” says Ruoff. “That is a credit to the shock-absorbing ability of the market resources and the fact that much of the catastrophe costs are ultimately absorbed directly or indirectly by government programs.”

However, using the past as a guide to the future, if Europe pushes the United States into another recession then “the P&C underwriting market will have to wait possibly until some time in 2013 before a cyclical type pricing change in commercial rates can be realized.”

Ruoff continues, “What we are witnessing now in the market has to do more with a leveling off of further historic rate reductions rather than a broad and sustained upward movement in pricing.”

Experts have suggested that the P&C industry is ripe for a turnaround. In the latest analysis, rating agency Moody’s says that for the 2011 third quarter, net income for the industry was down 70 percent over the same period last year.

The report followed another from Fitch Rating that says underwriting results for the first nine months of the year have deteriorated significantly over last year.

However, there are signs that carriers are getting rate increases, such as the recent survey from the Council of Insurance Agents & Brokers that found overall average rates have turned positive for the first time since 2003. But again, they are hitting speed bumps on their way to rate increases.

Europe’s Sovereign Debt Crisis Could Torpedo P&C Market Turn | PropertyCasualty360.