A massive surge in third-party capital into the reinsurance market could hurt the industry’s bottom line over the next two years, experts warned yesterday.

A report on the state of the market by professional services firm Deloitte said as much as $100 billion in cash could flood into the reinsurance market over the next five years.

The report added: “Competition from the glut of third party capital is only adding fuel to the fire.

“Traditional reinsurers are already competing in an attempt to deploy their excess capital.

“In addition, large cedants (insurance companies) are rationalising their reinsurance spending as their reinsurance purchasing decisions are increasingly made at the group level rather than at individual operating units.

“This portfolio optimisation approach is streamlining reinsurance programmes and reducing the number of reinsurers used for protection.

“As a result, we believe that competition among the Bermudian reinsurers would be fierce even without the surge of third party capital.”

The Deloitte report said it had downgraded its view on the global reinsurance market to “negative” from “stable” earlier this year.

The report explained that increasingly competitive underwriting would weaken profitability in 2014 and 2015.

And it warned: “We think that companies without a defendable competitive position or those that are most aggressive in maintaining market share by competing on price or relaxing their underwriting discipline are most at risk.

“We could revise our assessment of those reinsurers business risk profiles to reflect the relatively higher risk.

“In addition, we believe Bermudian reinsurers with diminished capital buffers, or those whose earnings capacity is persistently constrained could face rating pressure.”

The report said that pricing in reinsurance had been on a downward trend, with the January renewals rate declining by at least 15 percent in the US property-catastrophe market and by between five and 15 percent in other territories.

And it added that April renewals — which are mostly from Asian insurance companies — were likely to see double-digit drops.

The report said that the net effect of third-party capital was “negative”.

But it added that some reinsurers had joined forces with third-party capital providers to provide insurance-linked security funds.

The report said: “In this way, Bermudian reinsurers can offer both traditional and third-party capacity according to their respective risk and return requirements, thereby broadening their product offerings while earning fee income.

“Other reinsurers have been cutting back their participation in catastrophe markets and are looking to deploy that capital elsewhere and almost all reinsurers are now buying retrocession from third-party capital providers at favourable prices.

“As retrocession buyers, reinsurers can significantly reduce tail risk and lower their cost of capital.”

But the report warned: “Despite their efforts to either combat or harness the flow of capital, we believe the net effect for Bermudian reinsurers is negative.

“They will have difficulty adjusting when what has generally been their most profitable line of business in years with light-to-average catastrophe losses, rapidly loses pricing power and becomes commoditised.

“In the extreme, Bermuda reinsurers risk becoming mere conduits to the capital markets and mot the primary risk bearers. While we think that is unlikely, the push in that direction can’t be denied.

“Similarly, increased use of retrocession may lure reinsurers into arbitraging the rate gaps between incoming catastrophe premiums and outgoing retrocession.

“This could create situations where reinsurers rely too much on potentially flighty retrocession capital.”

The Deloitte review added: “Many of these companies will prove successful in navigating this soft market by adhering to established underwriting and risk controls.

“It will be these companies on the margins and those that relax their rigour that are likely to succumb to consolidation or suffer negative rating actions.”