The property and casualty insurance industry is expected to lose $5.5 billion this year, which will make 1985 the worst year ever for the industry, a trade association reported.

The $5.5 billion in pre-tax operating losses for 1985 follows what had been the previous record loss of $3.8 billion in 1984, the Insurance Information Institute reported.

Despite the record red ink, insurance industry executives said companies are showing signs of emerging once again from the "down side" of the regular cycle of rising and falling claims that grips the industry. The continuing recovery should make insurance increasingly available, but at sharply increased rates, for those who had trouble obtaining coverage in 1985, the analysts said.

The industry group said insurance companies this year will pay out in claims $25.2 billion more than they will collect in premiums. This underwriting loss is up 17 percent from $21.5 billion recorded in 1984. The income insurers earn by investing the money they collect in premiums grew 11.3 percent from $17.7 billion to $19.7 billion, the institute said.

The net losses to the companies should be much lower after taxes are calculated because they are allowed to take hefty tax credits in future years as a result of losses, analysts said.

The industry is expected to cite the 1985 results in asking legislators to control the escalating legal judgments against professionals and businesses. The industry says the cost of the legal system has been a major factor behind its recent losses, although critics say the companies themselves are to blame.

A major reason for the record losses in 1985 is the huge amount of money insurance companies were forced to pay for damages from catastrophes, especially hurricanes. As a result of 1985's six hurricanes -- the most to hit the U.S. mainland since 1916 -- insurers paid out $1.13 billion in property damage claims, according to the institute. Most of these losses stemmed from Hurricane Elena, which caused insured damage of $543.3 million, and from Hurricane Gloria, which caused $418.7 million in claim payments, the institute said.

It said the total 1985 catastrophe figure of $2.82 billion exceeded by 25 percent the worst previous record: $2.25 billion in 1983.

Without the catastrophes, the year "would have looked a little better than 1984," said Leslie Cheek, vice president for federal affairs at the insurer Crum and Forster. Cheek said that, although 1985 was a bad year for the business, the industry is starting to recover from its price wars of the early 1980s, which he said drove premium rates down far too low.

"The industry is at least in part responsible for its own problems," Cheek said. "It would have been a lot worse if it hadn't dawned on all managements, not just a few, that they needed to raise prices."

The institute reported a 20.9 percent increase in premiums for the industry in 1985 compared with a 9.2 percent increase in 1984 -- a trend that should continue in 1986. Sean Mooney, the institute's economist, said he expects premium gains averaging between 17 and 20 percent in the coming year.

"Rate increases in commercial lines probably will exceed this range, while rates for personal lines -- home and auto insurance -- will increase at a lower rate," Mooney said.

Signs of the turnaround for the industry can also be seen in the booming results for insurance stocks. Donald Franz Jr., who follows the industry for Smith Barney, Harris Upham & Co., said insurance stocks gained 40 percent between the end of 1984 and the beginning of December, outpacing the market's overall performance. "We're bullish. We're still in the early stages of a recovery that will probably last for four years," Franz said of insurance stocks.