Some reinsurance bosses believe the industry needs a major catastrophe to thin out a crowded marketplace and to reverse the ongoing trend of falling reinsurance prices.

That is something that industry analyst Taoufik Gharib, of Standard & Poor’s Rating Services, has heard in his conversations with executives of some Bermuda reinsurance companies.

Reinsurance rates have been tumbling in recent times, driven by a lack of catastrophes and an influx of third-party capital — and Mr Gharib expects to see them continue to fall, albeit at a slower rate of decline.

“Some people are looking for a ‘big one’,” Mr Gharib said in an interview with The Royal Gazette. “It would harden the market and differentiate between winners and losers. Right now it seems like it’s a crowded market.”

A major catastrophe would expose those with lower underwriting standards, notably those who have priced risk too cheaply in the pursuit of market share, he added.

New York-based Mr Gharib, who is the rating agency’s director, financial services ratings, North American insurance, covers the Bermuda market. He is on the Island this week to participate in the Bermuda Reinsurance 2014 conference, which takes place at Pier Six on Front Street today and is presented by S&P and PwC.

Mr Gharib expects to see rate reductions of five to ten percent at January 1 renewals next year — particularly in property catastrophe business — based on his conversations with industry participants.

Pricing is one of the key points S&P looks at when evaluating the health of the industry and the trend of decreasing prices was a major factor in the rating agency’s decision to give the reinsurance industry a “negative” rating outlook for 2014 back in January this year.

The burgeoning supply of capital from institutional investors in the form of insurance-linked securities such as catastrophe bonds has accelerated the fall in rates and “alternative capital” now has a market share of more than 15 percent, according to broker commentaries.

Mr Gharib believes this is much more than a passing phase, basing that view on the profile of the investors.

“The way we see it, there are strategic investors and opportunistic investors,” Mr Gharib said. “The strategic investors include pension funds. They enter the market after doing 12 to 18 months of research and allocate one percent or less of their assets to it. They are here for the long term.”

Strategic investors understood the risks of losing capital and would not be so quick to pull their money out in the event of rising interest rates making other assets more attractive, he added.

“The opportunistic investors include hedge funds looking for higher returns — but even if interest rates go up, some of them will stick around,” Mr Gharib said. “Alternative capital is here to stay.”

The glut of money pouring into catastrophe bonds has resulted in lower returns for investors and cheaper reinsurance for cedants. S&P views this influx as a negative for the reinsurers it rates.

“Some reinsurers are driving prices lower to match what the cat bonds are offering and to maintain their market share,” Mr Gharib said. “It is impacting pricing in this way and reinsurers’ margins are declining.”

In recent years, reserve releases have been significant contributors to the profits of Bermuda reinsurers, but Mr Gharib has seen a trend of declining releases and expects it to continue as reinsurers become less conservative in making loss estimates.

However, Mr Gharib expects 2014 to close out as a profitable year for Bermuda’s reinsurers, largely because it’s been a “somewhat benign year” in terms of catastrophic events. Additionally, most Bermuda reinsurers are extremely well capitalised and Mr Gharib expects them to spend much of this year’s earnings on buying back their own shares.

Reinsurers, whose investment portfolios are dominated by sovereign bonds and highly rated fixed-income securities, are seeing their investment returns squeezed by low interest rates. Many are responding by increasing allocations to riskier investments in hedge funds, Mr Gharib said, showing a larger appetite for investment risk than they have done historically.

Pockets of growth for the Bermuda market include crop reinsurance and accident and health, while the latest opportunity being seized appears to be mortgage reinsurance.

“Mortgage companies need to carry more capital, because of potential new regulations coming up,” Mr Gharib explained. “They can either increase their capital or buy reinsurance.

“Mortgage underwriting has been significantly strengthened since the global financial crisis, so the reinsurers are getting a good book of business.”

Although many Bermuda market companies portray themselves as “global”, Mr Gharib said for most part their business was still concentrated in the US. Some like PartnerRe, XL and Axis Capital did have truly global platforms, he added, but several more were now expanding into emerging markets, the most promising of which was South East Asia.

Many Bermudian reinsurers had diversified into primary insurance, giving them the flexibility to deploy more capital in whichever was the most attractively priced area.

Overall, Mr Gharib sees Bermuda continuing to be a major player in the global reinsurance market.

“Bermuda has approximately eight to ten percent of global reinsurance premiums,” Mr Gharib said. “It’s well established in the market and is known as a centre of excellence in property catastrophe reinsurance. That’s a fact.”