The storm clouds that tend to visit America’s Atlantic and Gulf coasts each autumn may have a silver lining for reinsurers based in Bermuda. A new report from New York-based Deloitte, which features analysis from Standards and Poor's reinsurance director Laline Carvalho, says a variety of factors have quelled reinsurers' appetite for risk, which will result in higher prices for reinsurance.

"The reversal of softening pricing conditions on the reinsurance sector has been one of the few positive consequences of the large catastrophe and investment losses incurred in 2008," the report, titled Navigating Through the Storm, states.

The report notes that Bermuda-based reinsurers were battered by investment losses, with companies participating in the survey reporting $13 billion in investment losses for 2008 and a 15% contraction in capital and surplus compared to the previous year. What's more, the report says reinsurers will be exposed to potential losses from their Directors & Officers (D&O) liability portfolios as a result of ongoing litigation, but says that any potential losses will be largely offset by careful underwriting.

Yet, the financial storm is not the only factor for the market hardening.

"Beyond financial market-related concerns, the apparent increase in the frequency and severity of natural and man-made catastrophe losses over the past decade continues to expose Bermuda writers to potentially significant earnings and balance sheet volatility on a year-to-year basis," the report states.

The upshot of these factors is a lower appetite for risk among reinsurers. "The complexity of dynamics engulfing the macro-economic environment are causing most Bermuda (re)insurers to re-evaluate and in many cases lower risk tolerances across their organizations," the report states. "Most have expressed little interest in growing premium volume substantially in 2009, as additional capital to support such growth may be unavailable or too expensive."

For primary insurers, this translates into lower capacity and higher premiums for those writing policies in storm prone areas. Indeed, the report notes a 15%-30% increase in premium rates for catastrophe-exposed property risks in the U.S held by primary insurers. "Unless pricing for casualty reinsurance and US primary insurance business improves substantially, these lines are expected to receive a lower capital allocation by many writers on the island."

Another factor potentially impacting capacity is regulatory.  A bill that intends to tax foreign domiciled reinsurers operating in U.S. is currently under consideration in the House (H.R. 6969), and, if enacted, could have major ramifications, including reinsurers shifting capacity out of the American market. "With one of the key operating advantages for (re)insurers operating in Bermuda consisting of its tax-free status, the prospect of taxation for U.S. business would have significant implications for the island."

Despite the signs of hardening, the report states the market still has a way to go to account for potential losses. "Standard & Poor’s believes that further improvements in premium rates are needed in the global reinsurance markets to account for the significantly increased cost of capital due to unfavorable capital market conditions, the expectation of lower future returns on investments (which could erode expected margins for long-tail casualty business), and continued high frequency and severity of catastrophe losses."

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