While reinsurers have built up excess amounts of capital during two successive years of record profitability, they will now start to feel the crunch from catastrophe losses and market turmoil, says a new report by Standard & Poor’s (S&P).

The global reinsurance report released last week says that the second half of this year has been “a tough test of the resilience of reinsurer balance sheets” resulting from Hurricane Ike, which it says, “may well become the third-largest insured loss from a natural catastrophe”.

The New York-based ratings agency says while the reinsurance sector has in the past been able to absorb these losses, it warns “much of that cushion has now been eroded”.

S&P says it is likely that reinsurance rates will increase by 5-10% for 2009 to help company’s balance sheets.

It says “anything less” could cause the agency to change its outlook on the sector to negative, and to revise its ratings on reinsurers who have experienced the biggest losses over the next 12 months.

S&P estimates that at the beginning of the year the nine largest global reinsurers held $US25.4 billion ($38.7 billion) in excess capital. Since then it says more than 85% of that capital has eroded, “with further significant write-downs expected”.