(Bloomberg) — The worst reinsurance market in memory looks setto carry into 2015, industry executives said.

An absence of costly disasters and increasing competition fromnew entrants dragged on prices this year, and reinsurers maystruggle to halt the slide when they meet with brokers and clientsin Monte Carlo this month to begin negotiating next year'sproperty-and-casualty policies.

“This soft market is probably in a universal way unmatched byprevious cycles I've lived through,” said Manfred Seitz, managingdirector of international reinsurance at Warren Buffett's BerkshireHathaway Inc. and an industry veteran who started his career atMunich Re in 1972. “We have a deterioration of pricing over alonger period of time in practically all classes of business,” hesaid at a roundtable of reinsurance executives organized byBloomberg News.

Prices dropped this year during each of the policy renewalperiods in January, April and July, according to broker GuyCarpenter & Co., the seventh year in the past 10 that rateshave slumped. The declines were “across virtually all geographiesand lines of business, many in the double-digit range,” the NewYork-based firm said in a July report.

Reinsurers including Munich Re and Swiss Re Ltd. sell coverageto insurers such as Allianz SE and Axa SA to help them shoulderclaims.

'Shocking' trend

“The trend throughout 2014 was shocking — prices declined veryrapidly,” Juergen Graeber, a management board member at HannoverRe, the world's third-largest reinsurer, said at the Bloombergroundtable. “We don't have room to give. That's why we cannotcompromise on underwriting discipline.”

Record-low interest rates have lured new participants seekinghigher investment returns to put up capital to back reinsurancerisks. Hedge fund investors including John Paulson, Daniel Loeb andDavid Einhorn have established reinsurers to gain access to moneythat's less subject to client withdrawals and to benefit from taxadvantages in locations like Bermuda or the Cayman Islands.TIAA-CREF is among pension funds investing in insurance-linkedsecurities such as catastrophe bonds.

While lower-than-average catastrophe claims cushioned reinsurersearnings in the first half, they also eroded their pricing power asbuyers were less compelled to seek protection. Falling costs forreinsurance are putting pressure on primary insurers to reduceprices as they compete for business.

'Kidding ourselves'

“That capacity finds its way to the retail space and we areseeing this now in North America,” said Paul Horgan, who buyscoverage as head of group reinsurance at Zurich Insurance Group AG.“In terms of the pricing, if there are no major events ouranticipation is that it will continue to drift lower.”

Nikolaus von Bomhard, chief executive officer of Munich Re, theworld's biggest reinsurer, said on Aug. 7 that alternative sourcesof capital may lead traditional reinsurers to take too manyunderwriting risks to win business. That could force the industryto make riskier investments to offset unprofitable underwriting, astrategy that led to losses more than a decade ago when the dotcombubble burst.

“We are kidding ourselves that we can make good some of theshortfall on the underwriting by being more aggressive on theinvestment side,” Amer Ahmed, CEO of Allianz Re, the reinsurancearm of Allianz, said at the Bloomberg event. “It is burning thecandle at both ends.”

Catastrophe bonds

A.M. Best, Fitch Ratings and Standard & Poor's have anegative outlook on the reinsurance industry on concern thatshrinking margins and more favorable terms being offered to clientsthreaten to strain companies' financial strength.

Munich Re, Swiss Re and Hannover Re reported quarterly earningslast month that missed analysts' estimates, even as claims fromlarge catastrophes remained below their expectations. Munich Reshares fell 4.4% this year, while Swiss Re slid 8.9%. Hannover Rerose 1.2%, lagging the 3.8% advance in the 32-company BloombergEurope 500 Insurance Index.

Funds available to back reinsurance risks swelled to a record$555 billion at the end of March, according to Aon Benfield, thereinsurance brokerage unit of Aon Plc. It cited record capitallevels at reinsurers and “continually building interest fromalternative capital investors,” such as funds purchasingcatastrophe bonds.

Cat bonds pay investors above-market yields to assume risks tiedto a specific event, such as a hurricane or earthquake. If thedisaster meets pre-defined conditions, investors may lose interestand principal.

'Interesting point'

“The market is at a very interesting point,” said JonathanIsherwood, who's in charge of managing relationships with largeinsurance clients as head of globals at Zurich-based Swiss Re.“Technically, people are still making some money, but flattered byreserve releases and low cat losses. Some perils are belowtechnically adequate rates. There is pressure on pricing, but wesee flattening occurring — we see signs of that for example in theinsurance-linked securities market.”

Cat bond sales in the first half were the highest on record,exceeding the year-earlier period by almost 50% and bringing totaloutstanding bonds to a record $22.4 billion at the end of June,according to Aon Benfield. That pace slowed in the thirdquarter.

Demand has diminished a bit recently, said Pascal Koller, fundmanager and partner at LGT Insurance-Linked Strategies, which hasabout $3.9 billion in assets under management. Still, “we willprobably see some more pressure on pricing” for reinsurance, “evenif we do see an event in the remainder of the year,” he said.

To “meaningfully disrupt” the downward trend in prices, acatastrophe costing insurers more than $100 billion would berequired, Aon Benfield estimated. That would be 1.6 times theinsured losses from Hurricane Katrina, which devastated New Orleansin 2005.

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