The inevitable upswing in commercial premiums may be less than two years away as the premium wars begin to take a toll on underwriting profitability.

The latest JP Morgan/Deloitte General Insurance Industry Survey predicts profit erosion across commercial lines will force insurers to lift premiums, or risk plunging their balance sheet into an earnings hole once reserve releases run out.

Insurers have been dipping into their reserves in past years to subsidise losses made on commercial lines.

But JP Morgan analyst Shane Fitzgerald, co-author of the 2007 General Insurance Industry Survey, says insurers are "playing a game of chicken" by continuing to slash commercial premiums to maintain market share.

In the year to date, insurers have cut commercial premiums by an average of 8%, following a 9% cut across the board in 2006.

Aggressive pricing across commercial classes is also draining profitability, with the industry's combined operating ratio - losses plus expenses divided by premiums - rising to 94%.

Insurers are now losing money on commercial motor classes, with the survey predicting CTP lines in NSW will also sink into the red by next year.

"Combined ratios in the commercial classes will continue to drive competition, constraining future top-line revenue growth and putting pressure on margins," Mr Fitzgerald said.

He says the next two years are "critical" for the industry. The 2009 timeframe for an upswing in premiums is also based on insurers self-correcting their pricing, something he concedes would be an historic first.

Soft markets usually end after a major natural disaster - such as the 1999 Sydney hailstorms - or a crash in equity markets.

Mr Fitzgerald says the soft market will only end when at least 60% of the market increases rates.

"One of the challenges facing the underwriters is how they manage the pace of reserve releases," he said. "As the gap between accident year and financial year profitability continues to widen, even if premium rates turn in two years time, it could take considerably longer for the gap to close, particularly as the time lags involve movements in premium rates and their impact on profits.

"The critical issue is that accident year results recover back up to the same level of financial year results before the reserve releases run out."

The survey's co-author, Trowbridge Deloitte General Insurance Team Leader Elaine Collins, says most insurers are predicting a further deterioration in loss ratios.

"It would appear that this buoyancy in commercial lines is due to some extent to support from releases from reserves arising from claims development being lower than expected."