The days of a sudden hardening of the insurance and reinsurance markets in the wake of significant or catastrophic events may be over, a leading Bermuda reinsurance executive has said.

A hardening market and a turn of insurance conditions will still bring a recovery through increased premiums and new conditions, but never as sharp as in the past, according to president and CEO of PartnerRe Holdings Ltd. Herbert Haag.

After several years of hard competition and soft rates, insurers and reinsurers have been waiting for industry losses they feel may be the catalyst to the weeding out of less competitive firms, and a return to better pricing.

But Mr. Haag has told Best's Review the total market will not allow the reinsurance industry to correct terms and conditions in such a major way as it did in 1985 for the liability side or in 1993 for the catastrophe side.

He said there were too many capital market players, such as investment banks and commodity exchanges, outside the industry waiting to get access to the insurance and reinsurance business. He said there were other innovative methods of risk transfer ready to enter the market when the terms improve.

And he warned, "The traditional insurance and reinsurance industry is well advised to keep these corrections at a reasonable level.

"On the other hand, it also means that the prices shouldn't fall further or should actually not have fallen as far, because the corrections will not be as good as we would expect.'' He said the sector is much more dependent on the results of the financial markets, at present.

"As long as insurance companies and reinsurers can earn a lot of money on the investment side, the incentive to do a proper underwriting job is reduced,'' he argued.

"And so first, I think, that investment returns have to change, and underwriting profitability needs to be eroded.

"I think if this happens, if the reinsurance companies no longer make profits and they do not compensate the lack of underwriting profit by investment income, the shareholders will not allow this to continue, and then there will be an automatic change in conditions in the market.''