If other catastrophe insurance industry players have been coping with unnerving uncertainty for the past two decades, for reinsurers, this period has been of extreme volatility and formidable challenges. From low capacities, that led to credit default, loss of credibility and lowered ratings to excess capacities that resulted in a prolonged spate of soft rates, poor corporate results-not to speak of growing competition from alternative risk transfer mechanisms-reinsurers have undergone a 360-degree experience in change and evolution. This article takes a look at the new reinsurance market dynamics and what the course of the much-debated future of the sector is likely to be.

With two successive low loss years (2006-2007), reinsurance rates were soft during this period—a trend which has continued throughout the first half of 2008. The other reason behind the softening of rates is the build-up of reinsurance capacities over the past few years, not to speak of increased self-insurance, where primary insurers are beginning to cede less. Basically, recent dynamics in the global reinsurance markets have been reflecting these demand supply equations—but with caveats.

For example, take the case of Florida, where the state Hurricane Catastrophe Fund, that came into existence in early 2007, freed up a large quantum of traditional reinsurance capital. This fund does the work of a surrogate reinsurer, and is supported by the state government which enables it to offer reinsurance at less than private reinsurance market rates. However, it is quite likely that the lower cost of state-sponsored reinsurance will get nullified eventually because, like most state-sponsored programs, the Florida Fund would also need to increase taxes to fund its corpus—this step of raising taxes to meet insurance needs often meets with opposition from taxpayers all over the country. Why? Because raising funds this way often translates into cross-subsidization of catastrophe-prone states (that could often be affluent) by states that are not very hazard-prone (but could be less affluent than the former). Because of this, state-sponsored programs do not command too much popularity in the market, in spite of the state government's backing or the cost factor advantage of this fund. This becomes obvious because many of the insured have bought coverage from the private insurance market, also, from insurers who have, in turn, gone in for private reinsurance. Tapping the private market became inevitable after the fund faced a deficit after some initial rounds of catastrophe funding. Despite this, the fund's planned expansion will result in a loss of premiums to the extent of around $1.5-2 bn in a $11-12 bn global reinsurance market.

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