Last year's combination of high catastrophe losses and shrinking investment income could have led to a "perfect storm" this year in the Bermuda market for property reinsurance — but it hasn't worked out that way.

That is one of the views expressed by global insurance broker Willis Holdings Ltd. in its publication "Marketplace Realities 2010", published this week.

In the report's section on the Bermuda market, Willis also concludes that it is a "confusing time" for the Island's casualty market, with rates showing few signs of hardening and increasing competition adding to the downward pressure on premiums. The report stated: "A year ago, the Bermuda property market was beginning to see a gentle hardening of rates, reflecting underwriters' declining investments and fears that carriers would be unable to recapitalise in the event of future losses. All variables pointed toward a perfect marketplace storm. "Between Gustav and Ike causing $20 billion of insured losses, Midwest floods and an unprecedented number of tornadoes, 2008 was the third costliest year for catastrophe losses. The overall industry combined ratio finished at 105 percent in 2008, compared to 95 percent in 2007 ¿ while 2008 investment income fell by nearly 50 percent. And yet, no perfect storm." Combined ratio is the percentage of premium dollars spent on claims and expenses and reflects underwriting profitability.

"Moreover, as of this writing (admittedly in the middle of the Atlantic Basin storm season), no dramatic hurricane," the report added.

"So far, 2009 has not seen the severity of losses either from a Nat-CAT or on a risk-loss basis that we saw with monotonous regularity in 2008. "Even with quake losses in Italy, Japan and Indonesia, and a typhoon in Japan and monsoons in India, the market here would need a $25 billion to $30 billion loss to trigger reinsurance programmes and cause significant increases on the direct side." Willis added that on the casualty front, premiums remained flat overall, with a few exceptions, including large pharmaceutical, energy and life science risks.

"This remains a confusing time for Bermuda casualty, as the market is reluctant to harden despite losses, deteriorating combined ratios and rating agency downgrades of carriers," the report states.

"All signs suggest the market is ripe for significant change in 2010, but the number of markets in Bermuda alone (16, with total capacity of $1.5-plus billion) and very competitive lead pricing in the US domestic marketplace seem to be mitigating pricing pressure.

"Additional competition from new Bermuda markets (Torus, Iron-Starr, ArgoRe and Canopius) is also driving premiums lower, although the technical rate is actually increasing in many cases as buyers report significant declines in revenue and exposure."

Commercial directors' and officers' accounts were renewing flat or with decreases of up to 20 percent, Willis added.

But financial institutions are finding it more expensive to buy this type of insurance.

"Many carriers have scaled back the limits they will offer financial institutions, especially on errors and omissions cover," Willis reports.

"A few carriers are willing to take on this exposure and are earning significant premium for it, but claim settlements from the world financial crisis may be looming.

"No one can be sure they are writing this business profitably."

More Bermuda carriers are getting involved in the health care arena, Willis added. Underwriting profitability had improved in medical malpractice coverage, as "tort reform of the last several years has helped tame the runaway verdicts that have influenced the marketplace for years".

However this was also causing rates to fall.

Bermuda-based carriers and their affiliates to enter the market include IronHealth, Allied World US, Endurance US and Max Managers in the US; Barbican in London; and Torus, Iron-Starr, Canopius and Hiscox in Bermuda.