Many reinsurers have exhausted their catastrophe loss budgets for this year and are raising rates while managing capacity more tightly, according to a report by Willis Re.

But Willis Re Chairman Peter Hearn says although rates are increasing on natural catastrophe exposures, the Japan and Christchurch earthquakes will not trigger market-wide rate increases for all classes.

Like most reinsurers, he believes the trigger for higher rates could come from further natural catastrophe losses from the looming North Atlantic and European windstorm season.

“It could, though, come just as easily from other pressure points, such as inflation, the reversal of back-year reserve releases and wider financial issues impacting investment income and balance sheet strength.”

Mr Hearn says the first-quarter events “have definitely accelerated the likelihood of a market-wide turn” and capacity tightening is occurring in both key catastrophe zones and secondary zones.

He says that of $US60 billion ($57 billion) of insured losses in a 13-month period, about $US35-42 billion ($33-$40 billion) have been passed to reinsurers.

“Fortunately, this run of losses is occurring at a time when the global reinsurance industry’s financial position is strong. Excellent underwriting results in 2009, together with strong investment performances for both 2009 and 2010, have left the industry with a robust capital position.”

Mr Hearn says the major ratings agencies are confident the reinsurance industry can absorb the losses, although there will be an impact on company earnings and this is likely to reduce capacity for share buybacks and mergers and acquisitions.

He notes that collateralised markets’ ability to provide additional retrocession capacity will be highly dependent on their ability to raise new funds. This could be a challenge, as capital markets are also potentially facing losses on two or three catastrophe bonds.