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Reinsurance market soft as renewals loom

Expectations that the reinsurance market will harden for the 2010 renewals is fizzling out. Quiet catastrophe season, improved finances, an improved investment environment, and less demand by primary insurers mean reinsurance prices will be flat to slightly lower levels for January renewals, many observers say.

They say there is no market turn in sight, despite the rate hardening predicted earlier this year. Now, many say only a major catastrophe would turn the reinsurance market in the near future.

While capacity is more than adequate now, some question reinsurers’ ability to replenish capital should a major catastrophe occur. Even if they can obtain more capital, it is likely to be neither as easy nor as cheap as previously, observers say.

Another worry is the prospect of increased inflation in light of all the money being pumped into the US economy and its effect on reserves for long-tail business.

The reinsurance industry, however, has been more disciplined in its underwriting this year than primary insurers, leading some observers to see a “disconnect” between the two sectors.

“We think the sector is looking in reasonably good shape,” said Chris Klein, head of the business intelligence group at Guy Carpenter & Co. L.L.C. in London. Reinsurers had sufficient capital to weather the financial crisis and 2008’s hurricanes, “so all those factors indicate that we’re going to have a flat renewal process,” except for loss-affected areas, where there will be increases.

Bryon G. Ehrhart, chief executive officer of Aon Benfield Analytics in Chicago, said, “We’re projecting a mild softening globally” because of “increased capacity from reinsurers through their earnings and recovery in insurance companies’ balance sheets. Those two combine to increase supply and potentially decrease demand and that should yield softening.”

There “seems to be adequate capacity for any reinsurance risk we’re putting together, unless it’s a most unusual circumstance, such as a startup,” said Steve McElhiney, president of Dallas-based intermediary EWI Inc. “But across the board, it seems like there’s plenty of capacity.”

Richard DiClemente, president and CEO of New York-based THB Intermediaries, anticipates lower reinsurance pricing at the upcoming renewals. “Other than spot catastrophe exposures, there’s more than ample capacity for the rest of the exposures in the normal marketplace,” he said.

Reinsurers “now understand the long-awaited hard market is not coming to fruition, and they will have to adapt or see business flow into higher retention on the part of primary companies,” Mr. DiClemente said.

Laline Carvalho, a credit analyst with Standard & Poor’s in New York, said reinsurers have “substantially recovered a good portion of the investment losses they had last year,” so their capital position has improved substantially since June 30 and is expected to improve further when third-quarter earnings are announced.


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