With a lack of significant catastrophe activity in the past year and certain areas of the reinsurance market showing signs of softening, there's a calm over the seas of reinsurance, at least on the surface.

Beneath the surface, though, there still is some turbulence, including certain troublesome casualty lines, continued contraction of the market and closer scrutiny by ceding companies of reinsurers' ability to pay claims going forward.

And, there's always concern at this time of year over whether the rest of the hurricane season will pass without a significant loss.

"I think people are saying, `Are we coming out of a hard market?' and I think, quite frankly, that's a rather negative way of looking at it. I think we're in the middle of a very healthy market," said James P. Bryce, president and chief executive officer of IPCRe Ltd. in Pembroke, Bermuda.

"I guess there are aspects that are hard, hard being, `Can you buy coverage at any price?"' Mr. Bryce said. "Following the tragedy of 9/11, it was an improving market overall propelled into a healthy market."

"There are pockets where there's an unavailability at any price, which I would define as a hard market," Mr. Bryce said, citing such areas as errors and omissions and directors and officers liability coverages.

"Overall, I would categorize the reinsurance marketplace as still being a hard or hardening market," said Dirk Lohmann, group chief executive officer of Converium Ltd. in Zurich, Switzerland.

"There are certain spots where, due to a lack of any significant loss activity over the last 20 months, pricing is beginning to level off or even soften slightly, but at very profitable levels mostly," he said.

Mr. Lohmann said the areas where some softening can be seen are in the low frequency/high severity lines, such as property catastrophe and airline insurance.

"Additionally, we have seen some return to competition for large property risk business that I would call the national accounts" in the United States, the Converium CEO said. "In these areas, my expectation is that future rate development will become largely event-driven. If no further large-shock losses arise, we can expect to see some further pressure on pricing. If losses occur, I expect we will see a leveling off or maybe even some increases—particularly in the reinsurance contracts covering these risks."

"It's really a very quiet market," said Steven Bolland, senior vp at reinsurance intermediary Gill & Roeser Inc. in New York. "It's softening up. No big surprises, but we're just seeing an overall easing in pricing, and there's a lot of capacity and generally very few problem areas."

"The last year-and-a-half has been very good from a catastrophe standpoint," Mr. Bolland said. "And, at least on the property side, people have made a lot of money, and they're trying to put it to use."

"Casualty's a little different, but not much," he said, citing medical malpractice and D&O as problem areas.

Mr. Lohmann said that in areas such as casualty or longer-tail lines and in specialty lines—including credit and surety—he continues to see rate increases and tighter underwriting standards, with capacity tight and terms and conditions still moving in reinsurers' favor.

"Here, the past loss emergence is keeping the fire to the feet of the primary companies, and reinsurers have also been observing deterioration of the experience," Mr. Lohmann said. "This will keep pricing moving upwards, particularly as many markets see the drop in investment income flow through to their (balance sheets) due to ever lower investment returns being generated on the operating cash flows," he said.

Mr. Lohmann said he expects that in many areas, particularly casualty lines such as professional liability, products liability and umbrella liability, renewal negotiations this January might be even tougher than last year's.

"From a capacity point of view, two areas have been suffering from shortages in reinsurance capacity: D&O and surety," Mr. Lohmann said. "The number of reinsurers providing both classes has declined, and in D&O reinsurers are more keenly aware of the danger of accumulation across cedents, since many primary insurers are cutting back their limits and a buyer of D&O has to tap into many more providers in order to secure the limits their directors are demanding."

Impact of new players

It's widely agreed that the capacity that came into the Bermuda market since the terrorist attacks of Sept. 11, 2001, has had a significant impact on the catastrophe reinsurance market.

"Clearly, there is more supply for catastrophe risk than there is demand, with the exception perhaps of certain peak zones such as Gulf Coast hurricane risk in the U.S.," Mr. Lohmann said. "This has led to a quicker leveling off of pricing on catastrophe business than one might have expected. That is not to say that prices are not attractive, because they are. This is largely because many of the new markets in their first 12 to 18 months acted as following markets and not as price leaders."

The lack of significant losses at Bermuda reinsurers has served to increase capacity in the market, Mr. Bolland said. "All that capital that went to Bermuda after 9/11, basically nothing has happened," he said. "Those guys are making a lot of money, and their capital has increased proportionately."

Given the hurricane season, clearly significant risks persist for those reinsurers, but, "If nothing happens in the next six to eight weeks…those reinsurers are going to have another real great year," Mr. Bolland said.

On the other hand, "It will be interesting to see what the Bermuda capacity does if we get the big one or two at the end of the year," said Paul Walther, CEO and principal consultant at Reinsurance Directions Inc. in Healthrow, Fla.

Mr. Lohmann said he thinks a key issue is where that new Bermuda capacity will go next.

"The real question lies in what will the new markets do as they begin to increase their diversification and move into noncatastrophe lines," he said. "Many have been gearing up and clearly have an appetite to increase their market share. This will probably have a greater influence on the shape of broker-driven markets, such as the U.S. or U.K., than it will on classically direct markets such as continental Europe, where client access and local market knowledge are key."

Signs of trouble?

While the current market appears to be a healthy one for reinsurers, there are signs that not all are well. In August, Standard & Poor's Corp. said that continued rate increases in the global reinsurance market have not stemmed downward pressure on credit ratings in the sector.

"Despite further price increases in the January 2003 renewal season, the market continues to suffer from diminished quality of capital, reduced financial flexibility (defined as the ability to source capital relative to requirements), prior-year liabilities, the overhang of reinsurance recoverables and the likelihood that many companies' operating performance will fall short of expectations," the rating agency said.

The ease of new players' entry into the reinsurance market and increased competition has hurt established reinsurers' ability to improve their fortunes, S&P said.

"Even though it's a healthy market, not all the players are healthy," said IPCRe's Mr. Bryce, adding that issues such as adequacy of capitalization and reinsurer payment are factors in some quarters.

"There seems to be a polarization where the strong are getting stronger," he said. "It's not doom and gloom for everyone, but you're starting to see it get easier to differentiate. It's not just ratings, it's, `Is the reinsurance performing?' It's not the promise, it's the execution of the promise."

"One of the things that a lot of people are looking at is the subject of performance in reinsurance," said Robert W. Hammesfahr, a member of the Cozen O'Connor law firm in Chicago. "And performance is not just on the reinsurer's side—i.e., payment of claims—it's also somewhat on the cedent's side in terms of integrity of accounting."

A weak global economy, underperforming investments—particularly the large equity portfolios of many European reinsurers—and a decade of underpricing have all taken their toll on the financial positions of many reinsurers, Mr. Hammesfahr and others say.

"What a lot of people would say is there has been good performance in terms of 9/11 claims," Mr. Hammesfahr said.

Aside from those, however, "There seem to be a lot of delays," he said. "I think the reality of the matter is, you can only drain the cash so many times."

A telling factor is the number of reinsurance disputes in the courts, the attorney said.

"From the legal side, there are more than 150 new reported reinsurance cases (in the U.S.) in the last five years," he said. This is "really significant when you think that most reinsurance cases aren't reported, they're handled through arbitration."

Meanwhile, "The dotcoms, the Enrons and the WorldComs of the world disclosed that the internal accounting standards of a lot of companies that were considered very reputable companies were inadequate," he said. Given those deficiencies in financial data among previously well-respected companies, "then you could see why reinsurers are saying that performance is a two-way street."

"I think the reinsurance companies have every reason to expect that there be integrity in the financial figures," Mr. Hammesfahr said. "They're asked to pay based on very limited information."

Mr. Walther said he's starting to see ceding companies address some of their concerns over their reinsurers' ability to pay future claims in the reinsurance contract language.

"It is intriguing to see there are agreements in certain contracts that the ceding company can make changes if the reinsurer's rating falls below a certain level," he said. "I think a lot of self-respecting buyers of reinsurance really do need to take a look at their contract wording and make sure their interests are protected upfront."

"It's all part of the negotiating process. And, again, it's sort of a function of supply and demand," Mr. Walther said. "It's all very well to pay X price for Y coverage, but at the end of the day, part of the determination of that pricing has to be the likelihood that XYZ Co. is going to be around to pay that loss down the road."

Mr. Bolland said the increased ability of reinsurance buyers to take such steps is a result of increasing competition in the market.

"What we're seeing is people looking at security. People have a lot more options than they did last year," he said. "I'm not saying they would have taken any offer last year because, obviously, they wouldn't. But this year they're able to move up in terms of security."

"Cheap reinsurance is only cheap if the guy's there to pay," Mr. Bolland said.