Despite gloomy predictions for the global reinsurance industry by ratings analysts, the Australian market is in good shape.

WR Berkley Re GM Australia & NZ Peter Nickerson says Australia has its own reinsurance model which results in “some differences” with global markets.

“We are not suffering from the sort of pressures occurring in other parts of the globe,” he told insuranceNEWS.com.au.

“While in some markets such as property there are 20% discounts, it doesn’t flow through to the reinsurance market,” he said. “In Australia it is very much steady as you go.”

Research house Moody’s has given a negative outlook for the global reinsurance market in its Global Reinsurance Outlook report.

“Fundamentals for the sector are more likely to weaken than improve in the next 12 months to 18 months as the sector will be challenged by soft pricing, over-capacity and low investment yields,” Moody’s Senior Credit Officer James Eck says in the report.

“With premium volumes drifting lower and equity positions holding steady, we believe the industry has too much capacity, which is likely to manifest in increased price competition going forward.”

In Australia, the reverse has happened, with reinsurance capacity declining.

Mr Nickerson says more than 30 reinsurance companies were operating in Australia a couple of decades ago.

“Today there are about 16, of which eight are active,” he said.

“But reinsurance is now a true international model, so all the local companies are parts of multinational reinsurers.”

This has resulted in reinsurance for local catastrophes, such as the March hailstorms in Melbourne and Perth and this month’s earthquake in Christchurch, being spread globally.

While there are no final figures on the Christchurch claims at present, catastrophes such as the Chilean earthquake and storms in the US earlier this year have resulted in claims of between $US8 billion-$US12 billion ($8.4 billion-$12.7 billion).

According to Standard & Poor’s (S&P) many reinsurers have exhausted more than half of their catastrophe budgets for the year, leaving them with reduced resources to pay out any further events.

In its report on the Chilean earthquake, S&P notes Munich Re increased its loss estimates by 43% – $US300 million ($318 million – to $US1 billion ($1.06 billion). Swiss Re increased its exposure by 26% – $US130 million ($138 million) to $US630 million ($668 million).

“We believe the accumulated losses from the Chilean earthquake have materially affected the earnings of property and casualty reinsurers worldwide,” the S&P report said.

“According to the reinsurance companies that have reported their losses so far, the weighted-average Chilean losses reduced about one-quarter of their reported net incomes as of June 30.

“Therefore, we expect that with the exception of a few outliers, these losses will be an earnings event rather than a capital event.

“Based on these disclosed losses, we do not anticipate rating changes at this time.”

However, the scale of any more catastrophes that occur before the end of this financial year will dictate whether reinsurers need to go to capital markets for more funds.

The ease in raising further reserves depends a lot on how the ratings agencies maintain their outlook on the sector.

Aon Benfield says the ratings agencies are playing a role in increasing capital reserves.

It says insurers will probably need to hold more capital as a result of continuously evolving ratings agency criteria and numerous proposed regulatory changes globally.

But reinsurers say most ratings agencies have a less-than-positive view of the sector.

Three of the four main agencies give reinsurers a stable rating while Moody’s has a negative rating for the sector.

The global head of Aon Benfield Analytics’ Ratings Agency Kelly Superczynski says continued negative pricing by reinsurers is impacting profitability.

“Many companies have revised their risk tolerances in light of lower earnings,” she said.

“Ratings agencies see lower earnings putting capital under greater pressure, driving their negative outlooks.

“At the same time, refined ratings agency and regulator criteria and capital requirements are placing additional pressure on an already struggling industry.”

But despite the criticisms and concerns, Munich Re for one is quite bullish, predicting stable prices and conditions for property-casualty reinsurance renewals next year.

“Rates have improved significantly in lines of business hit by heavy losses, such as offshore energy and in the case of natural catastrophe covers in Latin America,” Munich Re Reinsurance CEO Torsten Jeworrek said at the annual Reinsurance Rendezvous in Monte Carlo last week.

“The very heavy losses caused by the earthquake in Chile have shown how important it is to ask a price commensurate with the risk, even in years where losses are relatively light.”

Mr Jeworrek says financial strength is essential for the reinsurer. “Growth without profitability is out of the question.”

The only question left is, how profitable do they have to be and still be able to meet the increasing costs of catastrophes?