Reinsurance rates are in decline and the market may be in a position to sustain a loss of up to $25 billion before the situation changes, according to a reinsurance broker's report.

Earlier this week, Aon Re Global, the reinsurance brokerage arm of Chicago-based insurance broker Aon Corp., released its sixth annual Reinsurance Market Update at the Rendez-Vous de Septembre in Monte Carlo going on this week.

The report said that reinsurance price increases peaked in July 2006 after the 2005 Atlantic Hurricane season losses. The decline comes as the cost of equity markets and debt capital increase for primary insurers.

What this means, Aon said, is that insurers will turn more and more to reinsurers to finance risks they would have retained instead of alternative financing markets.

“We see the 2008 market cycle as an exciting and challenging one as reinsurance has the opportunity to play a larger role in capital management strategies,” said Byron Ehrhart, president and chief executive officer of Aon Re Services, in a statement.

Aon Re said the size of a property or casualty event to change the current market trend would have to fall in the range of $15-to-$25 billion in ceded losses. Barring a major event, insurers will be more likely to turn to reinsurers than the equity, senior and subordinated debt markets.

“With capacity greatly expanded since Hurricane Katrina in 2005, the reinsurance market now provides efficient property, casualty, life and insurance enterprise risk transfer and contingent capital solutions,” Aon Re said.

Large buyers of property catastrophe reinsurance are utilizing 10-to-25 percent of catastrophe capacity in the capital markets, Aon Re said. From January through July of this year, the reinsurance markets have funded more capacity than was issued during all of 2006, the broker added.

In an analyst's note, David Small with Bear Stearns observed from the firm's own visit to the Rendez-Vous that price declines are expected to continue in 2008. Insurance companies are increasing their retentions to drive their own growth, posing an obstacle to reinsurers own business growth.

Reinsurers may see pressure on their margins as they spend to hire more analytical talent, but brokers have not been able to pass on the cost of this service to the carriers, according to the analyst.

Terms and conditions may see marginal softening, but multiyear deals are occurring. The capital market involvement in the reinsurance arena has reached its peak. The markets remain “rational and disciplined,” but there are occasional discussions of overly aggressive underwriting to attract new business, the analyst found.

Mr. Small suggested that “a broader lack of discipline is likely not too far behind, particularly given the level of capital in the industry.”

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Reinsurance Rates In Decline

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