Analysts say a combination of factors is conspiring to make rate increases for both commercial and personal lines inevitable, possibly by the beginning of next year.

Loss cost inflation (the cost of claims) will force insurers to increase rates for personal lines, says Myer Shields, a financial analyst for Stifel Nicolaus, in an analyst’s note.

Shields says private passenger auto is “still fairly stable,” but because some insurers are seeing a higher level of loss cost inflation, some may need to raise rates higher, benefiting those carriers that have controlled those costs.

Both State Farm and Mercury General are expected to raise rates as their loss costs deteriorated. These increases are expected to benefit the likes of Progressive, GEICO and Allstate—companies that have managed to keep these costs under-control.

According to Highline Data, a Summit Business Media Company that also owns National Underwriter, State Farm is the nation’s largest private passenger auto insurer with close to 19 percent of the market. Mercury General comes in 12th nationally as measured by direct premium written.

Allstate, GEICO and Progressive place 2, 3, and 4 respectively.

For homeowners’ insurance, Shields says profits are eroding more quickly in the face of loss costs than on the auto side. However, the belief is that carriers are managing to keep rates up with these loss costs far better than they in early 2004 and the end of 2008.

State Farm is the top insurer in this group with more than 22 percent of the market followed by Allstate, Zurich (Farmers), Liberty Mutual and Travelers, respectively.

On the commercial insurance side, declines in direct written premium and profit erosion are indicators of a coming market turn, two analysts said. Stifel Nicolaus says direct written premiums have declined across all market segments, but that is being offset to some extent by exposure growth. Pricing remains aggressive, meaning rates continue to decline.

But this aggressive pricing, Shields says, “accelerates the march toward inadequate underwriting results.” Eventually those results will mean carriers will need to increase rates to produce positive results.

In his regular newsletter on market conditions, Charles L. Ruoff, president of CR Market Strategies, Inc., notes that market turns occur when investments no longer produce adequate returns to losses. That market deterioration is taking place now, he says.

“We are currently witness to the same type of deterioration in market fundamentals that suggests a change is not far away,” Ruoff notes.

Based on net earned premium, Ruoff suggests that the soft market cycle will trend to a hard market by early 2012.