Reinsurers are looking to optimise returns on capital through tighter risk appetites and higher risk charges, reflected in January 1, 2009 renewal rates with significant price increases in capital intensive lines of business.

That is the view of Peter Hearn, CEO of Willis Re, who was writing in the company's thrice yearly 1st View publication about the current re/insurance market conditions, claiming that the biggest rises were in the US nationwide catastrophe business.

Mr. Hearn said the unprecedented turmoil in the global capital markets during the second half of 2008 had ravaged the balance sheets of many financial institutions, consigning some to footnotes in history and others to government bailouts, but added that the re/insurance industry had remained unscathed with a capital base mainly intact and liquid.

"While not currently impaired, reinsurers have recognised that in the current financial market climate, obtaining new post-event capital will be both difficult and expensive," he said.

"Primary insurance companies are also facing capital pressures, and as a result, the gradual decline in demand for reinsurance over the preceeding few years has started to abate.

"Now cedants are exploring buy-downs and other reinsurance mechanisms in order to protect and enhance their capital positions."

Mr. Hearn said that in line with the increase in demand for reinsurance capacity, Willis was seeing a shift in the manner by which cedants choose re/insurance partners, as the global financial crisis prompted a fundamental reassessment of credit risk.

With third party credit ratings no longer sacrosanct, he argued, insurers were seeking to diversify their portfolios to reduce their counterparty exposure, leading to a rise in the syndication of risk, which in turn allows re/insurers to obtain shares on programmes previously dominated by a limited number of big players.

But Mr. Hearn reckons the changing capital appetite among cedants presented the traditional re/insurance sector with an opportunity to win back market share, but believes the primary market has yet to realise the full scale pricing increases derived from the deepening global recession, falling yield curves, rising loss ratios and expected increases in re/insurance pricing levels.

"In order to regain their previous position, reinsurers will need to balance attempts to realise portfolio management objectives with the real economic constraints faced by their insurer customers," he said.

"Judged on markets' performance at January 1, 2009, the industry is meeting this challenge with appropriate product, price and capacity."

The report outlines the movements in pricing and conditions by class and territory which Willis has observed over the January 1, 2009 renewal season, identifying the capital intensive lines and areas of particular challenge the sector faces in the New Year.

In the international casualty reinsurance sector, Willis views professional indemnity and directors and officers exposures being under greater scrutiny due to today's economic turmoil with some restrictions being introduced.

Meanwhile, conditions in the casualty insurance market continued to lag those in the reinsurance sector, as insurers competed for business with rate decreases of up to 10 percent in some areas, while reinsurers sought to renew programmes with no signs of loss development at expiring to slightly increased terms, the report found.

In specialty lines of business, Willis said that issuance in the capital markets had stalled while details of collateral accounts were worked out and the market cleared itself relative to redemptions and sales by multi-strategy funds, while rates had increased slightly as a result of increasing limits on direct policies and lack of re/insurance capacity in the life sector.