Are Capital Markets In Insurance For The Long Haul?

Instead, he said that at best they will complement the traditional reinsurance markets, but pointed to certain drawbacks.

With investment banks, he said their transactions entail "road show" presentations and involved legal processing. "With reinsurance, it's a phone call or an e-mail," he added.

Benfield, said Mr. Karon, has been active in the sidecar market with the creation of the Starbound sidecar, which provided Benfield customers with a $300 million limit of protection for clients who needed capacity.

Another reinsurance broker, Bill Adamson, CEO of Carvill America, in a separate interview offered a differing perspective, suggesting that capital market investor interest in reinsurance would have more staying power.

In Mr. Adamson's view, capital market money is unlikely to leave the reinsurance market anytime soon because it represents only a small percentage of their assets and they like the diversification it offers.

Mr. Adamson, based in Chicago, said his firm prefers industry loss warranties, which provide coverage when there is an industrywide loss that reaches an agreed-upon trigger point that is certified by Property Casualty Services.

He said his carrier, a subsidiary of Bermuda parent Carvill Group, sees ILWs as being "more flexible…You can do it more quickly and it's a speedier way to get capacity."

Thomas Upton, S&P's property-casualty team leader, said short-term investors in such offerings as catastrophe bonds and reinsurance sidecars are being motivated not only by good returns in the current environment, but because they offer investments that are negatively correlated with their other risks.

However, he believes that "if property-cat rates drop, at some point they would drop out."

Mr. Upton said the presence of such investors has been healthy for the marketplace, adding that even if they were to drop out due to falling prices, these same investors would return if catastrophe rates rebound.

"These unusual instruments are a very positive thing," Mr. Upton commented, adding that they would only be viewed as a concern if a reinsurer became excessively dependent on them. However, he was quick to note that he was unaware of any reinsurer that was in such a situation.

As for the market's outlook, Carvill's Mr. Adamson said he thinks property reinsurance contract renewals will range between 20 percent and 40 percent higher, while casualty rates remain stable. His firm's study of capacity shows that it is very tight in peak zones where there are high concentrations of risk, he said.

Carvill's analytics group has found there is a $47 billion shortage of capacity, according to Mr. Adamson, who said new capital flowing into Bermuda start-up operations "doesn't make a dent" in the shortage.

Mr. Adamson noted that the current mild hurricane system, while reducing claims numbers, is unlikely to have much immediate impact on rates because one good year doesn't make up for the $80 billion insured loss registered during the past two hurricane seasons.

He also said he doubted the light volume of storms in the 2006 hurricane season is likely to change recent catastrophe loss models that have been generated.

Mr. Adamson added that among his clients the largest frustration is "the ability to buy reinsurance at prices they can afford." Some, he reported, are retaining larger amounts of risk as a result, and "some have cut back on their portfolios."

Mr. Karon of Benfield said that for the June reinsurance treaties being discussed here, he expected property rates on average would go up 20 percent after a "clean hurricane season."

Meanwhile, the chief executive of a major reinsurer said in an interview here that he believes insurers will deal with the current soft market without making the same mistakes they did in the late 1990s.

James H. Veghte, CEO of reinsurance general operations at XLRE, ticked off a number of market forces that he said are in place, which should keep insurers from taking on bad risks at bad prices as they did at the end of the last century.

The "natural brakes" on poor underwriting, he said, include the fact that "transparency of underwriting is vastly improved and tools on the reinsurance level are much more sophisticated than they were 10 years ago."

"There were a lot of lessons learned in the late '90s that will put a brake on the soft market," he said.

Mr. Veghte said his company will do its part to ensure that insurers do not get out of line. "We do multiple audits on our larger clients," he noted. "If we see poor risk selection or sloppy pricing discipline, we'll retire [the risk] when the program comes up for renewal."

But while Bermuda-based XL may do its part, Mr. Veghte said he does have a concern about reinsurers who do not have the tools in place to do proper monitoring of carriers in the U.S. market place. "What worries me is people who write from abroad," he explained.

In general, he said he is "bullish on the market environment," and feels that short-tail lines should hold up, but he does have a concern about the casualty market.

Mr. Veghte voiced the opinion that property-casualty rates will be heading up again in the United States because of new risk models and pressure from rating agencies on catastrophe-exposed lines.

He said capacity exists for most lines–even for large programs with an exposure to Florida risks that "can be completed at the right price."

Mr. Veghte, who is based in the carrier's Stamford, Conn., office, said he believes his company may rank globally as high as seventh, but there is no pressure to rise in size, because "we don't focus on top-line growth–the focus is on underwriting."

The outlook for the property-casualty insurance sector appears good for the next six months, according to S&P's Mr. Upton.

However, he said that while there is a good feeling in the industry after an easy hurricane season, analysts have a concern that insurer casualty rates could start drifting down with growing speed.

Another concern is that competition may overheat in the casualty sector, and that adequate terms and conditions will be compromised.

Mr. Upton also noted a worry that regulators may intervene on pricing if insurers continue to enjoy an absence of catastrophes.

Additionally, the rating firm is wary about the possibility that there might not be renewal of the federal Terrorism Risk Insurance Act, which provides a government backstop in the event of attacks inflicting super-catastrophe losses.

In reviewing insurer capital strength, Mr. Upton said changes in frequency estimates by catastrophe modelers have led them to put an increased charge into their assessment.