A spate of disasters early this year, the ongoing oil spill inthe Gulf of Mexico and predictions of an active hurricane seasonhave reinsurers on edge. But with capacity still relatively high,the U.S. reinsurance market remains soft and is well capitalizedfor the challenges ahead, according to experts in the field.

“The lament is everywhere, whether you talk to brokers orcarriers–there's too much capacity,” Hank Watkins, president ofLloyd's America, told National Underwriter. And as far asany indications of a hardening in the market, “there hasn't been acataclysmic event that would suggest that coming any time soon,” headded.

“The industry is pretty wellcapitalized,” according to Sean McGovern, director for NorthAmerica and general counsel at Lloyd's, who observed that reservesare strong and investments are better than expected.

“We went into this year thinking there wouldn't be anything interms of investment return, but actually the market as a whole hasbeen fairly strong, compared to where we thought it would be,” hesaid.

“We're all holding our breath, but the Central Fund at Lloyd'shas never been any bigger–?2.6 billion,” or $3.89 billion atcurrent exchange rates, he noted, referring to the fund thatguarantees payment to those buying coverage through the Lloyd'smarket if a syndicate should fail.

In January, he recalled, “we had a big Europeanwindstorm–Xynthia–and the Chile [earthquake] loss, where Lloyd'sissued [an insured loss] figure of $1.4 billion.”

However, he added, “with the capacity that is in the market, wehaven't seen an event yet that's going to significantly changerates across the board.”

Overall, according to Mr. McGovern, rates are down or flat,other than in segments such as the energy market, “where quitefrankly they needed to harden significantly, because that's amarket that's struggled to make money over the long haul.”

In fact, he said energy rates are expected to rise about 50percent, thanks in large part to fallout from the the BP spill. “Asrecently as April we didn't see much change, but we're seeing itnow,” he added.

Mr. McGovern said that in many ways, the oil industry and energyunderwriters have had “a close shave in the sense that BP islargely self-insured.” If the Gulf spill had involved anotheroperator besides BP, he noted, “this would have been a verysignificant loss to the energy market.”

“What we're hoping for is that the platform operators, the oilcompanies, and the insureds and reinsurers will heed that fact–thatthey've had a near-miss here that could have been a catastrophicloss for the industry,” Mr. McGovern said. “It will be moremanageable because of BP's self-insurance.”

The fact that BP is self-insured, he added, doesn't mean therewill be no “leakage into the [insurance] market through liabilityclaims, but I think the industry has had a near-miss.”

Jeff Palmer, a managing director of LECG SMART at the firm'sglobal headquarters in Devon, Pa., observed that “most people thinkit will be like a [directors and officers] type of situation forBP, as far as what are the insured losses. That will beinteresting.”

Just how the presence of oil in the Gulf might impact insuredlosses following a hurricane is another wild card in the market, hewarned. “It could be a sticky mess, not necessarily a contaminationproblem.”

He recalled that when Hurricane Andrew struck Florida, a powerplant was hit and their biggest cost was an oil drum that waspunctured, causing oil to be blown everywhere.

“It took a lot of time to clean that up. It was time and effortas opposed to any hazardous material,” Mr. Palmer concluded.

As for the reinsurance market overall, however, “the biggestword I get is that it's relatively quiet out there right now,” hesaid. “Capacity is not an issue–there's plenty of capital in themarkets.”

That excess capacity, Mr. Palmer added, has resulted in pricereductions over the last couple of renewals.

“Depending on the line of business, most people are talking 5percent to 10 percent,” he said. “Most people are not saying it's asoftening market–they're saying it's a reaction to conditions backin 2008 and 2009 with the financial crisis.”

Because of the collapse of the housing and banking markets,sending the United States and some European countries into a deep,persistent economic retraction, he said, “all the carriers took abig hit, and they tried to protect themselves because their capitalwas going down. So they are going back to [capital] levels prior tothat.”

“I think everyone is being cautious,” Mr. Palmer said. “It's nota response where people are chasing the market. It's more of ameasured response.”

Because there is plenty of capital available to insurers, “theyare offering price reductions, but they are not cutting to thebone,” according to Mr. Palmer.

While some would say price reductions of 5 percent to 10 percentindicate a soft market, many are seeing it as a “status quomarket,” he said. “If you have a good program, you can get somereductions, but the only place you are seeing increases is in verytargeted books of business where they have been traditionally badperformers.”

Presently, Mr. Palmer said, the market could be described as“very quiet and calm. They're taking a breath after all thathappened with the financial things.”

But even with the financial debacle that drained insurers'capital, he added, “they were able to recover quite nicely with theinvestments. So their assets recovered quite nicely and it was alsoaccompanied by a very low catastrophe year. The combination ofthose two things let everybody recover fairly well.”

At the moment, reinsurers have “some capital, and there's stillplenty out there, so we have to make sure we watch the capitalthat's flowing into the market and make sure we keep our share ofthe market,” he said.

Mr. Palmer also noted that people are trying to priceappropriately, pointing out that “this is always a difficultendeavor. They want to get the right price but make sure they holdonto their current book of business.”

He emphasized that “you haven't heard of any price leaders outthere slashing the market, trying to gain market share. You haven'theard of someone driving the market down out there. Everyone ishappy about that.”

Beyond the BP oil spill, the first quarter saw a number of largenatural catastrophes, which did hit some reinsurers, “and theforecasts for hurricane seasons are quite dire at this point, sowe'll see what happens,” he said.

Mr. Watkins cited a trend continuing from 2009, which is brokerconsolidation–especially on the wholesale side.

This trend, he said, is continuing mostly because of retailers“who run their own agency or firm. They're waiting for that hardmarket to come and lift the valuation, but they don't see itcoming.”

The environment for brokers globally is tough, Mr. McGovernadded. “It's a hugely competitive market and the brokers, frankly,are killing each other to win business. We're seeing consolidationin London as well.”

He pointed out the opportunity in the United States to educatebrokers who haven't historically dealt with Lloyd's on what themarket can offer them and how they can access the market.

Mr. Watkins noted that in the current soft market, “a number ofthe standard carriers have come into the formerly surplus linesspace and taken a bite out of that.” To reach brokers, Lloyd's isoffering webinars and other online events through broker andsurplus lines organizations.

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