The deepening soft market with the insurance and reinsurance sector, highlighted by an on-average nine percent drop in January 1 renewal rates, does not necessarily mean profits will vanish during the coming year.

That is the view of Professor Robert Hartwig, chief economist at the Insurance Information Institute in New York. He believes much will depend on what type of catastrophes occur in the coming 12 months and how insurance risk for those occurrences has been priced.

Greater experience on how to handle soft market conditions, compared with six or seven years ago, has resulted in companies remaining profitable during the current market cycle.

Prof. Hartwig believes there is a high probability that the coming year will see more acquisitions and mergers as firms look for ways to grow in a tougher market environment.

He told The Royal Gazette: "We are seeing what we've seen at the primary level (insurance). The renewal prices are fully part of that and reflect better experience that has come from the last few years that that we saw in 2003, 2002, 2001.

"There is more competition. That comes from the fact that quite a few new start-up reinsurers were formed after Hurricane Katrina (in August 2005)

"As well, there has been a significant use from new types of reinsurance risk and that is something that is continuing. There has also been some competition from states, like Florida, that has resulted in further additional capital."

Prof. Hartwig, chief economist at the New York-based Insurance Information Institute, said the industry has so far remained profitable despite falling prices over the past two years.

He said: "I would expect the reinsurers would be profitable in 2008."

But with lower renewal rates, the chances of an associated risk being underpriced, increase. Only when a catastrophe occurs and the payout on claims takes place will any discrepancy become apparent if there has been a misjudgment in setting a renewal rate too low.

Prof. Hartwig said: "It would depend on the size of the catastrophe and where it occurs. A major landfall hurricane in Florida would have less impact that one in Texas because of the state shouldering more of the insurance in Florida."

He agrees that there is pressure on primary level insurance rates for the past two years as seen on ROE (return on equity) and that will be seen amongst reinsurers.

Looking to the near future, Prof. Hartwig predicts a greater number of mergers and acquisitions as companies look for ways to grow, pointing to the move in the final days of 2007 by Warren Buffett's Berkeley Hathaway to set up a bond insurer.

The current soft market is not expected to bottom out until insurance market policyholders surplus falls below 3.2 percent, according to Advison's editor-in-chief David Bradford. For that to happen there would need to be a $115 billion insurance loss hit on the market. To put that in perspective, the worst year on record was 2005 when insurance losses topped $60 billion.