Reinsurance companies may have a harder time recapitalising than they have done in the past, if the industry has to pay out heavily for a major catastrophe this year.

That was one of the conclusions of a report by global brokers Willis Group, which suggested that with the capital markets having suffered their own "storm", post-event liquidity is now less certain.

Entitled "Whose Cycle is it Anyway?", the report finds that while softening in the reinsurance market continues unfettered, a disparity remains between reinsurance and primary pricing levels.

While recent reinsurance price reductions have provided some relief for many cedants, these gains may quickly reverse in what is a deceptively tenuous environment, the report noted. The report focuses on rate movements across numerous territories and includes detailed analysis from Willis Re's product line experts.

The report also looks at US business written out of Bermuda and states that risk losses in the first quarter appear to have had a low impact on pricing.

It also found that a combination of underwriting discipline during the soft market and the use of similar pricing models mean that most programmes have a "cliff price" at which reinsurers will walk away from the business, especially where more than $100 million of limit is being purchased.

Key findings of the report include:

• Reinsurers may need to implement more transient capital structures and take on additional leverage if post-loss funding becomes less attractive to capital markets.

• Potential sub-prime "shock losses" and falling rates / pricing present greater parameter risk — taken together, these may cause edginess about reserve adequacy.

• With the brunt of the Atlantic hurricane season yet to arrive, the potential for further, sizeable losses looms and reinsurer 2008 profits are anything but assured.

• Some investors have shifted their focus from the ILS sector to opportunities in the credit markets that are perceived to be more attractive.

• As the market increasingly understands the benefits and advantages of ILS products, a less cyclical outcome is probable.

Willis Re chief executive officer Peter Hearn said: "Our industry faces many traditional risks, but it is the 'tail' events like 9/11, Katrina and the sub-prime crisis that drive change in the intertwined global reinsurance marketplace.

"Current pricing trends, however, seem to indicate that the market is giving little weight to the potential for extreme events."