A hard market is highly unlikely to materialize without a major catastrophe—either natural or financial, say many observers.

Others, however, believe other factors, including low interest rates, eventually will lead to a market turn.

“The industry went through a significant dislocation with the financial crisis and Hurricane Ike” and it was not enough to harden the market. It will “take a significant amount of capital to be withdrawn,” said Devin Inskeep, senior financial analyst with Oldwick, N.J.-based A.M. Best Co. Inc.

“We think it's going to take a very significant cat, even north of $50 billion, for the market as a whole to react across all lines,” said Pina Albo, president of Munich America Reinsurance, the reinsurance division of Munich Reinsurance America Inc. “Barring that, I'm counting on reinsurer discipline, quite frankly, because the exposures are still there in our business.”

The reinsurance market won't harden without a significant event to turn it, said Bryon G. Ehrhart, chairman of Investment Banking Group and chief executive officer of Aon Benfield Analytics at Aon Benfield in Chicago. “It's operating at a very high level of profitability, and its earnings are growing more consistent even though they are still volatile.” Mr. Ehrhart noted reinsurers are expected to have returns on equity of 14-16% next year, which “are high levels historically.”

Eric Brosius, senior vp and manager of reinsurance for Liberty Mutual Insurance Co. in Boston, said a turn “could come either from a substantial catastrophe, or from other pressures,” including profitability pressures, with investment yields inadequate to cover underwriting losses. Obviously, he added, a catastrophe will turn the market more quickly.

A turnaround could result from several factors, said Jamie Veghte, chief executive officer of reinsurance operations for XL Capital Ltd. in Stamford, Conn.

A combination of low interest rates “and, at some point, prior-year (reserve) releases no longer being able to support calendar-year earnings. That is going to be a lethal combination for people in long-tail lines,” said Mr. Veghte, who predicts the market will start to see “some correction in the next 12 months.”

Mark Lane, a principal and research analyst with William Blair & Co. L.L.C. in Chicago, said, “it's going to take several more quarters of underlying pressure on profitability for companies to really get a sense of urgency in pushing prices.”

“The reality is, the profitability of the underlying business is very good, and the returns are adequate and therefore, in a market that's capital-driven, that's competitive, there's not a lot of motivation to push on pricing despite the obvious concerns,” which include low interest rates, rating agencies becoming more negative, and still-tenuous capital markets, said Mr. Lane.

But the market has recently endured tough conditions without hardening, said Paul Newsome, an analyst with Sandler O'Neill & Partners L.P. in Chicago.

“We saw statutory surplus for the industry fall in 2008 without a corresponding hard market” which has not happened before. “That leaves us uncertain as to what it will take to restore discipline to the insurance market,” he said.

John N. Gilbert Jr., chairman of reinsurance intermediary Holborn Corp. in New York, said, “I'm not sure it has to harden. A lot of reinsurers would like to see it harden, of course, but keep in mind that the ceding companies are under a lot of pressure right now. They're not able to get through the rate increases” and are seeing a reduction in premium income. “Some of that pressure has to be transferred to their reinsurers.”

Observers say one concern, however, is that the reserve redundancies that have been bolstering reinsurers' bottom lines are running out. Steven K. Bolland, president of New York-based intermediary Gill & Roeser Inc., said, “The theory is, you keep releasing your reserves in a soft market...and you hope the market turn occurs before all the releases are done.”

But, with no indications that 2010 will see a hardening, “it would be hard to see how people could increase core profitability,” he said.

Copyright © 2009 Crain Communications, Inc.