Insurers offering U.S. property & casualty coverage likely face price pressure and regulatory challenges in 2005 says a new report from rating agency Standard & Poor’s.

Commercial insurance rate increases peaked this year due to heightened competition, ending a run-up that started in late 2001. “Insurance companies saw that there was more margin than was sustainable,” said S&P credit analyst John Iten.

The increasingly competitive market, together with the commencement of numerous investigations of insurance companies by federal and state authorities in October 2004, led Standard & Poor’s to revise the commercial lines property/casualty sector outlook to negative from stable on Oct. 22, 2004, only four months after revising the outlook to stable from negative.

The insurance investigations ushered in long-term uncertainty and caught insurers off guard at a time when they were just counting the losses from this year’s hurricane season, S&P notes. The allegations of greatest concern are those involving illegal bid-rigging activity on the part of insurance brokerage Marsh Inc. and the participation of several insurers in this activity.

As well, there are other issues that have haunted U.S. commercial lines for years, such as delays in federal legislation on coverage for terrorist attacks, the postponement of reform in legislation to settle asbestos-related claims, the spread of construction-defect claims across several states, and rising directors and officers and errors and omissions claims stemming from shareholder lawsuits, particularly against financial-services firms that have faced a barrage of legal investigations of financial services since 2000.

Combined, these factors will have a material impact on earnings in the U.S. commercial lines property/casualty insurance sector. “This was the peak year for pricing. Next year will be the peak for earnings,” said Standard & Poor’s managing director Mark Puccia.

The full impact of rate increases in the first half of 2004 will be seen in 2005 because the premiums on policies bound in early 2004, when insurers were still getting rate increases, will be earned over the term the policy, S&P says.

The full impact of the legal crackdown is difficult to quantify, S&P allows. The ratings agency expects that some companies will incur fines and settlement costs as they strive to get these issues behind them. Other costs will be longer term, such as the impact of likely regulatory initiatives.

Yet even if insurers remain quite profitable, the fact is that rates are softening, which will place sustained downward pressure on earnings. Standard & Poor’s estimates that net written premium growth for the property/casualty industry, including personal lines, will slow to 6.3% for 2004 and 6.0% for 2005. Rates declined 5.9% on average in the third quarter of 2004, reflecting a decrease of 8.3% for large accounts, 6.4% for mid-size accounts, and 3.1% for small accounts.