Reinsurers have taken a battering this year but the outlook for the sector is positive, according to reports by ratings agencies.

Moody’s, Fitch, Standard & Poor’s and AM Best say reinsurers remain well capitalised and there is potential for rates to harden. Some reports say the market could turn if capacity is drained by another huge disaster, but Fitch estimates this would have to cost the industry around $US75 billion ($72.1 billion) and cause capital markets to lose confidence in the sector – a scenario it notes is unlikely.

In reports released prior to the Reinsurance Rendezvous in Monte Carlo this week, the agencies point to the market being at tipping point.

Reinsurance rates in Australia and New Zealand are expected to rise further in the January renewals as the industry claws back a year of catastrophe losses, says Standard & Poor’s in a report on the Asia-Pacific reinsurance sector.

The report says the impact on reinsurers’ financial profiles of the disasters starting with the first Christchurch earthquake a year ago can be managed.

Primary Credit Analyst Mark Legge told insuranceNEWS.com.au that July renewal price rises of 50% for joint Australia/New Zealand programs could be repeated at the coming January renewals.

He is expecting another increase of 100% for New Zealand, given the situation in Christchurch and the Earthquake Commission’s recent announcement that its claims costs have risen significantly.

Mr Legge says there is a great deal of uncertainty in the market due to the sheer number of natural catastrophes in the region and the difficulty of calculating the gross claims.

But he does not expect any material withdrawal of capacity from the region, noting it offers global reinsurers diversity of exposure and improved prospects for pricing.

The cost of reinsurance in Japan has risen significantly, but the report says pricing in the rest of Asia is uncertain, reflecting the counteracting effects of shrinking global reinsurance capacity and the rapid growth of primary insurance in the region.

Moody’s has upgraded its outlook on the global reinsurance sector from negative to stable, which it says reflects the momentum for a hardening in rates, a refocusing on the value of reinsurance, and the good risk management and discipline across the sector in response to recent catastrophe losses.

The company’s latest industry outlook says significant price increases have been reported for some loss-affected regions/lines, but short-tail, non-loss affected areas have also seen pricing stability.

Fitch has forecast the global reinsurance industry’s combined ratio will deteriorate to 107.9% this year, from 94.7% at the end of last year.

But in its 2011/12 Global Reinsurance Review and Outlook, Fitch says earnings will gradually recover next year if losses normalise.

Its outlook for the industry is stable despite recent losses, which it says is due to buffers built up over recent years and effective use of retrocessional protection.

The company’s Head of EMEA (Europe, Middle East and Africa) Insurance Ratings Chris Waterman says reinsurance pricing is at a crossroads, and reinsurers’ ability to raise prices into 2012 will depend mainly on catastrophe losses this year.

“The recent downward revision of economic growth expectations by several major economies is expected to reduce demand for primary insurance and therefore makes it less likely that reinsurers will be able to raise rates,” he said.

AM Best says “hopeful signs” are emerging for the industry after years of a soft market, weak investment returns, lukewarm investor interest and sluggish consolidation activity.

It says although catastrophe losses are estimated to be as high as $US16 billion ($15.4 billion) for the first half of 2011, companies are hoping for “but not betting on” a more dramatic improvement in property catastrophe pricing at the January renewals.

Moody’s says although future pricing will be driven by the Atlantic hurricane season, it sees “broadly stable-to-strengthening prices” at the renewals.