The reinsurance market still has not found its balance according to recent conflicting reports about its well being.

On the one hand, there is over-capacity on the short tail-type business like property risks. On the other hand, there is a clear shortage of capacity for longer tail risks such as excess liability. This explains why the direct market is beginning to soften for property risks but is still hard for liability risks.

Reinsurance is the insurance of insurance companies and it is the principle way for insurance companies to spread their risks around to allow them to write more business.

The problem that is facing the reinsurance industry at the moment is the number of reinsurers who are also direct writers of insurance. They have not created the spread of business they need to remain profitable. Instead they are heavily concentrated with the same risks.

The "new" Bermuda reinsurance market, unhampered by past liabilities for the most part because of the new entrants to the marketplace post-September 11, 2001, seems to be doing extremely well. I call the reinsurance market in Bermuda "new" because prior to Hurricane Andrew, there was no real reinsurance market in Bermuda. After Hurricane Andrew, Bermuda became a significant property catastrophe reinsurance market. Then after September 11, 2001, Bermuda expanded beyond just a property cat reinsurance market to a true and diversified reinsurance marketplace.

According to some of the reinsurance underwriters in the Bermuda, reinsurance rates are back to where they were in April or May of 1996, which was a very good level for them.

However, there are already signs that the rates are starting to slide. In the property/cat reinsurance marketplace, there are so many new players that they are all chasing the same business which means in order to get the business, they must reduce their rates or expand coverages. One underwriter gave me an example of a pretty marginal risk that came into the market looking to write $500 million excess of $200 million programme in one block. Within three days of trying to place the cover, the client had over $1 billion in capacity available with a rate on line that was below what was expected for the risk. This shows just how much surplus reinsurance capacity there is in the Bermuda marketplace. It has also been the case that the primary insurers are getting better rate on lines than the reinsurance companies - which is quite a worrying sign.

The underwriter said the markets here are hungry for new business because of the concentration of new companies and established companies entering the reinsurance arena for the first time. This summation helps to explain why a recent RE report reported that, "a sample of eight Bermudian reinsurers recorded a 70.3 percent increase in gross premiums compared with the same period last year and a 150.6 percent rise in net income. The sample comprises four "post September 11" reinsurers - Allied World, Axis, Endurance and Montpelier - and four more established players in IPC RE, Max Re, PartnerRe and Renaissance Re."

The excess liability reinsurance marketplace, on the other hand, according to a study conducted by Willis Re stated that liability remains the toughest sector of the reinsurance market today, with little sign that the recent Bermuda entrants are interested in exposing themselves to this hazardous class of business. The reasons the liability reinsurance rates have not fallen as have the property cat reinsurance rates are based on the following:

Continued poor results in investment income which liability insurers and reinsurers rely on to help them grow their premium to pay for future losses;

The continued poor loss development of asbestos;

Adverse legal awards particularly in the US; and

The withdrawal of the European markets which used to dominate the excess liability marketplace particularly with the withdrawal of Gerling.

In addition, with a recent unfavourable asbestos verdict in California, the Hartford Insurance announcing that it was tripling its asbestos reserves and withdrawing from the assumed property/casualty reinsurance business, as well as the recent tornadoes in the Midwest and the Southeast, the reinsurance industry is still facing some serious challenges. How long can it continue to reduce rates without seriously hurting itself in the long run?

There are a lot of losses out there waiting to happen. This is the year of La Nina and we are already starting to see the strange weather patterns associated with La Nina. The industry had better be prepared for more catastrophes to come by preparing now to keep their rates at levels which will sustain their profitability through this tough year. Last year was an exceedingly low year for catastrophes - this year is already looking like it will not be the case.

On the excess liability side, asbestos is a risk to watch for the more established players as well as the continued poor investment returns across the board for all reinsurers. Therefore, it behoves the excess liability reinsurers to be more conservative in their pricing of this very long tail developing risk.

Because of the complex nature of excess liability reinsurance, next week I will talk about the new excess liability reinsurance marketplace in Bermuda.

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday. Feedback crduffy@cwbda.bm