Lloyd's of London warned yesterday that an absence last year of natural disasters or man-made accidents was putting pressure on firms to reduce premiums in 2008.

The world's oldest and biggest insurance market said that though the lack of major disasters had allowed firms to push up profits 5% in 2007, underwriting margins were being squeezed.

Almost half of the 320-year-old market's business was conducted in the US last year. It is a major insurer of the Florida seaboard and oil rigs in the gulf of Mexico. In 2005, a series of natural disasters culminated in Hurricane Katrina clattering into New Orleans. The clean-up bill pushed Lloyd's into a £103m loss.

However, two years of relatively few claims for environmental damage have increased competition in the sector. "On the back of a good performance in 2007 we need to sound a note of caution for 2008 because of softening market conditions and because of the financial turmoil we have seen," said Richard Ward, chief executive of Lloyd's.

"The indications are that people are being prudent in what they are doing by cutting back on writing business," he added.

Though the financial credit squeeze was unlikely to affect the market and the amount of business it was able to write, he said investment income, which makes up a large proportion of profits, could be hit. "Given that insurers derive much of their income from investments, it is a potential problem," Ward said.

The market, where 75 syndicates underwrite cover, reported a 2007 pre-tax profit of £3.85bn, up from £3.66bn in 2006.

Lloyd's combined ratio, a key performance benchmark that measures costs and claims as a percentage of premiums, rose to 84% from 83.1%, indicating that underwriting had been slightly less profitable. But Lloyd's said the figure compares favourably with the average ratios for US, European and Bermudan insurers.

Ward said moves by some syndicates to shift their headquarters to Bermuda to enjoy lower taxes had not affected their trading in the market. But he said it should be of concern to the British exchequer and showed that tax benefits offered to corporate insurers should also benefit Lloyd's syndicates.

Luke Savage, Lloyd's finance director, said he expected an increase in claims on company directors' liability and "errors and omissions" policies, reflecting the increased scrutiny of companies' finances. But he said the market had cut its exposure to such areas after problems with Enron, WorldCom and numerous technology companies.

"It's a fraction of the size it was," he said. "We would expect any claims to be in an order of magnitude lower than those we saw at the beginning of the decade."