Despite the higher profitability achieved by Canadian property and casualty insurers for 2004, the industry is unlikely to maintain this earnings momentum through this year and into 2006, according to the recently released fourth quarter 2004 "MSA/Baron Outlook Report". The report expects that developing pricing weakness in commercial lines, combined with the auto rate rollbacks applied in most regions of the country, will ultimately undermine the industry’s bottom-line. While insurers benefited from lower loss ratios and richer earnings from commercial lines during 2003 and into 2004, market signals already point to significant softening of rates in large commercial accounts, the MSA/Baron report observes. The price weakening is seen mostly in commercial property, although signs of softening are emerging in the casualty class as well, the report says. This year will likely yield healthy returns for commercial insurers, the report notes, but margins will be inferior to 2004 due to rising capacity chasing short-tail property business, encroachment by multi-line carriers into this arena, and overall intensified competition resulting in rate slippage. Although total claims cost growth for 2004 of the Canadian marketplace on a net claims basis grew by less than 1% last year, with direct claims growth (based on direct written premiums before ceded reinsurance) actually declining by 2% year-on-year, certain lines continue to produce above-average loss increases. The cost of claims for personal property grew last year by 14.3%, the report observes, with liability experiencing claims growth of 21.5%. Commercial property claims costs for 2004 rose year-on-year by a more sedate 3.3%. Of interest is that Canada’s biggest p&c insurance line of business, auto, saw claims costs for last year fall by 6%. However, MSA/Baron expect that claims costs across all lines will likely rise over 2005/6 as perceived coverage availability and price softening increases. The MSA/Baron report also notes that the industry’s growth in net written premiums for 2004 slowed to 8.3% – the auto, boiler, liability and surety lines generated reduced growth. Only the property line produced real premium growth last year, the report point out. However, more importantly, over half the growth achieved in net written premiums for 2004 can be attributed to increased retentions by primary insurers rather than increased business or rating. As such, retained premium growth will likely slow dramatically this year as insurers reach the limit to the risk they cannot afford to cede to reinsurers.