Will market dislocations, 2008 hurricanes be enough to turn the cycle?

“Has the pricing cycle turned?” Benfield asks in a new report. And, if so, “For how long and by how much?”
In its October 2008 Global Reinsurance report, ‘Capital ConsequencesBillion Dollar Question,’ Benfield has a detailed analysis of many factors that, taken individually, are not large enough in and of themselves to swing a market from a soft to a hard cycle.
“A market-changing event requires removal of significant capital from the market to generate a change in pricing,” the report notes. “Hurricane and investment losses in the third quarter have certainly made their mark, but the impact has to be judged on well-bolstered balance sheets.”
Taken together, however, market volatility and the impact of the 2008 catastrophes (including Hurricanes Ike and Gustav) do have analysts wondering whether the current soft market will change.
Benfield notes recent volatility in the investment markets may result in a greater reliance by insurance companies on underwriting returns, and this in turn may sharpen the focus on pricing.
Benfield notes the market dislocation associated with American International Group (AIG) Inc. could significantly affect the reinsurance industry.
The report notes AIG itself is a major purchaser of reinsurance, having purchased almost US$12 billion of property and casualty protection, ceding 20% of its total gross written premiums.
“The reinsurance needs of individual AIG primary insurance units may well change if and when they are sold, with some business formerly ceded to other AIG entities being placed into the open market,” Benfield notes. “Other things being equal, this could exert upward pressure on reinsurance prices.”