The reinsurance sector could be heading for a fall if three key risks to the industry become reality in the coming years, according to Guy Carpenter’s David Flandro.Growing catastrophe risk in the developing world, the chance of interest rate rises and declining reserve releases all pose a threat to Bermuda’s biggest industry — and the results could be dramatic if all three were to occur at once.Mr Flandro, global head of business intelligence for the global reinsurance broker, said the reinsurers were becoming increasingly aware of these risks to their business.The nature of losses in 2010 and 2011 taught the industry a lesson, Mr Flandro said. The floods in Thailand, the earthquake and tsunami in Japan and earthquakes in New Zealand were indicative of the kind of losses he expects to see in the future.“If you look over the past 20 years, 66 percent of losses have come from one place, the United States,” Mr Flandro said in an interview in Monte Carlo. “This certainly was not the case from 2009 to 2011, when only 33 percent of catastrophe losses emanated from the US.”The likelihood of the trend toward non-US losses continuing to build was illustrated by the changing geographic mix of insurance buyers. Research by Guy Carpenter showed that over the past five years, premiums in developed countries such as the US, Europe and Japan, had essentially been flat. Only in developing economies had premiums grown.“We have to consider how well we understand the risks in those areas. What happens if there’s a Shanghai typhoon, a Romanian quake or a Brazilian flood?” he said. The heating up of these catastrophe “cold spots” represented a significant risk for the reinsurance sector, he said.Interest rate risk occurs because of property and casualty reinsurers’ high exposure to the sovereign and corporate bond markets, where a large portion of their investment portfolios tend to sit. As reinsurers have become increasingly risk-averse, their equity portfolios shrank as they allocated more to bonds.“The first part of the last decade was a stock market bubble, the middle part was a real estate bubble — what’s the bubble now? If anything, we think we’re in a high-grade, fixed-income securities bubble,” Mr Flandro said.“What it means is that the sector is very exposed to interest rates. If we get an unexpected and sustained increase in interest rates, then the value of the bonds will fall, causing mark-to-market losses and directly impacting reinsurers’ balance sheets.”