Many property and casualty CFOs agree with what large brokers, analysts and industry observers have been saying: alternative capital isholding down reinsurance rates, contributing to a market that issofter than the primary market.

In Towers Watson's sixth North American P&C CFO Survey,which included 29 CFO participants, 55% of respondents say theproperty reinsurance market is softer than the primary market,while 34% say the same is true for casualty business. The CFOscited “the significant growth of insurance-linked securities andother alternative forms of reinsurance capital” as a primaryreason, Towers Watson says.

Regarding the impact the softer reinsurance market could have onthe primary commercial market, which has already seen some moderation in rate increases, Stuart Hayes, seniorconsultant, Towers Watson, says, “As reinsurance costs are acomponent of primary insurance prices, declining prices in thereinsurance market as a result of the influx of alternative capitalcould potentially contribute to a softening of the primarymarket.”

He adds, though, that there are other market forces thatdetermine pricing in the primary market, such as “profitability,competition and the availability of more traditional forms ofcapital to the primary market….”

Hayes adds Towers Watson's previous CFO study on the state ofthe primary P&C market revealed the current hard U.S. primaryinsurance market is “projected to be relatively shallow andshort-lived compared to prior hard markets, and the availability ofreinsurance capital could be considered as one possible driver ofthis.”

In the most recent CFO survey, nearly all respondents (97%) saythey utilize traditional reinsurance, while most insurers are notcurrently using alternative forms of capital to protect theirbusiness. “Twenty-seven percent are currently using, or lookfavorably on the use of, both insurance-linked securities, such ascatastrophe bonds, and hedge fund-owned reinsurers,” Towers Watsonsays.

In a statement, Hayes says, “The opportunities in therisk-transfer market are just starting to be realized. Many freshsources of capital are seeking investments that are uncorrelated totheir existing investment holdings. With risk-transfer arrangementscontinuing to evolve, we anticipate P&C insurers hasteningtheir participation in various structures across the risk-transferspectrum, thus complementing their traditional reinsuranceprograms.”

Even with the excess capacity in the reinsurance market, only21% of the CFO respondents feel there is a need for consolidationamong reinsurers, and just 24% feel consolidation will take placein the next two years. Fifty-two percent, though, say a prolongedsoft market could drive reinsurance-market consolidation in thefuture.