LAKE BUENA VISTA, Fla. -- The long soft commercial insurance market is coming to an end, and risk managers should brace for higher rates in the next two years, an insurer executive warns.

Various factors that have helped keep prices low for more than a decade have changed, putting pressure on insurer profitability, he says.

While rates will firm, particularly for liability lines, they are unlikely to harden as dramatically or extensively as during the mid-1980s, he adds.

"It seems clear that the party is over. Whether it be due to good management, pressure from the stock market or pressure from the rating agencies, we all must begin raising prices. You should expect to see a firming of prices in the next year or two," said Edmund F. Kelly, president and chief executive officer of Boston-based Liberty Mutual Insurance Co.

It's been a great ride for everyone in a booming economy, but the insurance industry is facing change, he said during the insurer's Seventh Annual Risk Management Forum held last week at Walt Disney World.

"We all -- the economy as a whole -- have had a great run for the last nine or 10 years," he said. "The property/casualty business has benefited along with everyone else."

Particularly beneficial to insurers, he explained, has been a low level of inflation. "This has produced a low cost of risk as well as slowing down an upward development in outstanding claims. Good news for American business and good news for us insurers," he said.

The cost of risk has fallen across all lines, Mr. Kelly said.

"The results for you, the customer, have been lower prices, improved capacity as well as broader offerings. Who among us would have thought in 1990 that coverage would ever be available again for environmental liability?"

In an era that has seen insurers become awash with capital while their costs have fallen, insurance companies have created "a pretty good environment" for buyers, Mr. Kelly told his audience.

"We've slashed prices, particularly in the commercial markets," Mr. Kelly said, creating the competitive underwriting cycle that has led to decreased profits.

But that cycle has pushed commercial insurance prices so low that "current business is barely profitable, if profitable at all," he said.

One indicator that prices have hit rock bottom is the behavior of insurance buyers, Mr. Kelly pointed out.

Risk managers are buying guaranteed-cost insurance programs for large risks because the programs are cheaper than alternative risk financing arrangements, he said. "That means those guarantees are grossly underpriced."

Liberty Mutual and other insurers are walking away from some business rather than write it at the low rates buyers seek, Mr. Kelly said. "For those of you who may have been prospects in those situations, please understand, we do want your business. We do love you, but at those prices, we can't even afford to date."

Mr. Kelly predicted that liability rates will firm but not as quickly as they did during the 1980s hard market. In addition, he said coverage availability probably will not vanish as it did in the 1980s for many lines of liability coverage. Even "esoteric coverages" such as employment practices liability and claims-made environmental liability insurance will remain available, he predicted.

"However, there will be little broadening in offerings," Mr. Kelly said. "You would be hard-pressed, for example, to find coverage for Y2K problems. Except, perhaps, for the one dollar of insurance for 99 cents in premium a large insurer offered for a while."

Mr. Kelly told risk managers they will see changes in the insurance distribution chain in coming years.

More insurers are providing a "non-broker option" as Liberty Mutual does when writing coverage, he pointed out. "As I speak, a Fortune 100 corporation is marketing its program. Liberty and four other major companies are bidding with no broker involvement."

Those other four insurance companies are ones that "heretofore would hardly have said, 'Gesundheit,' to a customer if the broker weren't present," Mr. Kelly said.

Many insurers will move to write insurance directly, bypassing the broker as an intermediary in the "large end of the market," he said.

Brokers will respond to this disintermediation by "trying to expand," he said. "That is, they will try to offer more claims and loss management-related services" and, in some cases, will try to "assume the total risk management function for large corporations."