The current turmoil in the reinsurance market with capacity crunches and hikes in prices will bring new opportunities for captives, according to a leading industry publication.

Captive Insurance Company Reports, in its latest issue, said that large owners of captives need a large amount of capacity, and if the reinsures will not provide it, captive owners will either fund their own business or start their own reinsurer.

“For captives, a reinsurance market in disarray will spell new opportunities,” wrote Kurt Falk of Swiss Re in the March issue of the industry publication. “Large owners of captives need big capacity. If the reinsurers won't provide it, captive owners will have to fund their own facility or found their own.”

The article said that the insurance market is in its third major hard market cycle in the past 15 years, the first being in 1985-1986, when there was a liability crisis, followed by the second crunch in 1993-1995 caused by Hurricane Andrew.

The article added: “The conditions leading to this current hard market are classic: losses rising, competition increasing, rates dropping. Fear of losing market share and long-term contracts led to a slow reaction time of this troubled industry.”

And it pointed to the decline in surplus caused by Hurricane Andrew and the Northirdge Earthquake.

And it said that cash flow from underwriting had been negative since 1990 which in turn led to a reduction of loss reserves and funds available for investment.

“Fortunately for reinsurers, investment returns were quite favourable until recently, so this delayed any reduction in reinsurers' appetite for assuming risk. When the investment climate turned chilly, and poor underwriting results could not be offset by capital gains any longer, insurance capital began to be depleted.”

Following major catastrophic losses and Y2K fears overall prices rose by 25 percent after underwriting guidelines were tightened, the article said.

And in trying to answer the question of just how big the September 11 attacks were on the industry, the article said that its effect have been both severe and the outcome is still uncertain.