NEW YORK—The commercial property/casualty insurance industry is likely to run out of redundancies as reserve releases continue and the market remains soft, observers say.

“The reserve position of companies is definitely not as strong as it was a year ago and two years ago,” said Bruce Fell, Philadelphia-based director of Towers Watson & Co.'s property/casualty practice in the Americas. “We've seen a lot of reserve releases,” and the trend indicates that while reserve redundancies have not yet run out, “they will be running out pretty soon”

New York-based Moody's Investors Service said it believes “commercial lines are break-even to modestly deficient” based on the most recent accident years, although there still may be redundancies for 2003 to 2007, said Senior Vp Sarah Hibler.

James B. Auden, an analyst with Fitch Ratings in Chicago, said, “In the hard market, quite a lot of reserve cushion was built up, and that's eroded significantly over the last several years” and reserving has been less conservative in recent years as well.

“We think the recent years are, at best, adequate,” Mr. Auden said. Looking ahead, the issue is “if insurers will shift to a deficient reserve position,” he said.

Key Coleman, Devon, Pa.-based managing director at consulting firm LECG L.L.C., said reserving and the soft market are factors that “impact each other and, ultimately, both impact the markets as a whole.”

Thomas Mount, assistant vp of casualty ratings at Oldwick, N.J.-based A.M. Best Co. Inc., said as rates soften, insurers “can't afford to take charges for reserve strengthening,” and actuaries may not be adjusting for factors such as softening terms and conditions, which “they can't really monitor that well.”

This could lead to business being written at a 65% loss ratio, when in fact “with all those richer benefits that the company was giving away...the loss ratio may be 75 or an 85, and when that happens, reserves are weakening because they are estimating reserves at 65,” Mr. Mount said.

Mr. Fell said he believes, however, there has been improvement in techniques that insurers use to evaluate reserves. “If terms and conditions are changing, companies are recognizing, and trying to do a better job of reflecting that, as well as looking at price changes per se” in setting reserves.

Mr. Coleman said one concern is that much reserve development data excludes asbestos and environmental losses. While that could be appropriate in certain instances, “in the future these A&E losses will continue to affect future calendar-year results of the industry.”