The property and casualty insurance industry faces a “slow, painful haemorrhaging of capital” - unless a huge catastrophe turns the market.That is the view of industry analysts Advisen, who published a report yesterday which suggested the industry was overcapitalised by $74 billion.Diminished demand for insurance during the global economic downturn, coupled with the rebound in financial markets over the last 18 months has left the industry with an excess of policyholders’ surplus, or capital, the report said.The report reflects the challenges faced by the Bermuda market, which is a world leader in the industry and provides about 40 percent of the property and casualty reinsurance in both Europe and the US.Many of the Island’s companies are trading at about 80 percent of book value right now and are putting their excess capital to work by buying back their own shares. Fitch Ratings said in a report on the Bermuda market released last month that the Island’s companies spent $4.7 billion buying back their own shares in the first nine months of last year - 12 times more than through the same period the previous year.“One unprecedented mega-catastrophe, or several very large catastrophes in close succession, could destroy the excess capacity and trigger a turn in the market, but the more likely scenario is slow, painful haemorrhaging of capital as deeply eroded rate levels take their toll,” stated the report, written by Advisen’s editor-in-chief, David Bradford.“Insurers will have limited ability to offset rising underwriting losses with reserve releases, and investment income will decline as insurers are forced to invest in low-yield fixed income instruments.”The grim outlook comes as Bermuda companies prepare to publish their fourth-quarter and full-year 2010 results over the next few weeks, which are expected to indicate solid profitability. However, these results were strongly supported by the release of reserves related to prior-year events, a contribution which is likely to diminish in the coming years, according to industry experts.“Reported results for 2011 and 2012 will not have the benefit of significant reserve releases from prior years, and will be more reflective of highly competitive market conditions,” Advisen warned. “Additionally, in the current very low interest rate environment, diminished investment income will put additional pressure on reported results; net investment income fell by 2.5 percent during the first nine months of 2010, and likely will continue to slip throughout 2011.”Advisen explained its $74 billion calculation, as follows: “As of the third quarter of 2010, US gross domestic product (GDP) was $14.8 trillion and US policyholders’ surplus was $544 billion.“Assuming no imminent and material change to the demand side of the equation, policyholders’ surplus needs to be reduced by roughly 0.5 percent of GDP, or $74 billion, to bring supply and demand into equilibrium. Hard market conditions would be triggered by the loss of materially more than $74 billion of policyholders’ surplus.”For more information, visit www.advisen.com