The property reinsurance market, despite a severe midyear U.S. capacity crunch, has recovered rapidly from record 2005 losses and marketplace competition is heating up, according to a brokerage firm's study released today.

Benfield, the London-based independent reinsurance and risk intermediary, made that finding in an 88-page report, titled "Pick'n'Mix," reviewing renewals, trends and issues in the global reinsurance market.

Benfield said although post-Katrina market discipline has not evaporated, competition in both property and casualty is being fueled by the drive for greater diversification, the appetite of newcomers to enter the market and the determination of established reinsurers to protect market share.

The study found that for year-end renewals, catastrophe rate increases in loss affected areas of the United States were steep but less than buyers had feared, while elsewhere reinsurance prices generally gave up the gains seen at last year's renewals.

The growing influence of alternative capital is one of several key market issues analyzed in the report, which concludes that the increasing ease with which capital markets vehicles can participate in the reinsurance market may have long-term implications for the reinsurance cycle.

The report said new capital from a variety of nontraditional sources continued to flow into the reinsurance sector during 2006 with inflows of some $8 billion attracted via catastrophe bonds and reinsurance sidecar vehicles.

While this still represents a relatively small amount of total reinsurance capacity, Benfield said the pace of innovation suggests the potential for change to the longer-term reinsurance cycle. Benfield remarked that in this regard catastrophe loans were a new invention.

The report noted an acute shortage of reinsurance and retrocession capacity for wind-exposed perils in the southeastern United States continued to act as a magnet for new capital from a range of sources.

It said this effect had coincided with a heavy weight of uninvested cash seeking attractive returns that appear to be unobtainable elsewhere.

Benfield noted that catastrophe reinsurance offers specialist investors the potential for supersize returns in a sector that is extremely responsive to market loss events, while at the same time providing portfolio diversification.

Benfield estimates that over $30 billion of new capital in various forms has been raised since Hurricane Katrina struck in 2005.

Grahame Chilton, Benfield chief executive, commented, "In 2006 we saw a gradual easing of traditional reinsurance capacity and a further development of capital markets alternatives.

"While this is still a small percentage of global reinsurance capital, the pace of innovation in this area suggests that alternative solutions will continue to develop alongside conventional reinsurance."

He added, "2006 was an unexpectedly benign year for catastrophe losses and reinsurers would appear to have recovered well. Demand for reinsurance remains strong as buyers continue to reassess their risk exposures and seek to manage volatility."

Special Reports /

U.S. Reinsurance Competition Growing: Benfield

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