LONDON (Reuters) ? A glut of new insurance capacity is pushing down insurance premiums in the UK and endangering the sector?s fragile recovery after a string of financial shocks, a leading insurance broker said on Monday.

The report by Aon Corp., the world?s second-largest insurance broker, will come as a blow to investors in the beleaguered insurance sector, which had seen a welcome return to profits in 2003 after several years of heavy losses.

The growing insurance capacity available to write business ?is already having the effect of driving down insurance premium rates at a time when insurers are still rebuilding their balance sheets and dealing with legacy issues,? said David Martin, chief executive of Aon?s UK Commercial Division.

Insurers had claimed that prices had only begun to level out after their sharp rise in 2002 and 2003. Martin said British firms can look forward to cuts in the price of many of their insurance policies. The steepest falls are being seen in property damage and business interruption policies ? lines of business which had attracted most of the new insurance capacity, he said.

Aon declined to put a figure on the size of the average cuts, but said most clients can expect ?significant rate reductions? in these lines of business. A clutch of new start-up companies ? most of them based in the tax haven of Bermuda ? have been established to take advantage of the high premiums seen in the past few years. Reinsurers have also provided more risk capital to enable insurance clients to compete harder, Aon said.

Though 2003 ?is possibly one of the best years of all time as far as the insurance community was concerned?, Martin said, many older companies are still struggling to rebuild their balance sheets after a series of financial shocks. The industry has been rocked by large claims such as the destruction of the World Trade Center, huge writedowns in the value of their investments and hefty reserve hikes for risks written back in the 1990s.