However, when there are cessions to reinsurers, he noted, the reinsurance sector is “keeping relatively disciplined.” He added that for the most part, reinsurers are “not going to jump in and provide coverage under a certain level of [rate] adequacy–so the programs can't be placed if the prices are not right.”

Even with the softening market, he said primary insurers are keeping more of their business because profit margins continue to exist, “even though they're not as good as before. I think there is also incentive to show growth, despite the fact that rates are going down.”

This is a concern, he added, because growth is viewed on a net-of-reinsurance basis. “If you cede less business, obviously your net results or net premiums are showing some growth–even though rates are going down. To me, that's not the right motivation.”

Better motivations might be, “we still like the price, or our balance sheet allows us to take on more [exposure],” he said, emphasizing that showing top-line growth “is by itself not a good reason.”

Yet as primary carriers keep more business, he said, the volatility of their results increase. “Since reinsurance is there to stabilize results, to the extent that they're buying less and less [reinsurance], they are exposing their balance sheets to a greater degree,” he observed.

Another factor that could impact cession rates later in 2008 and into 2009 could be mergers and acquisitions among primary carriers. “They're looking for ways to grow, and organic growth in a soft market is difficult,” he explained. “So there is a lot more attention being paid to M&As. I think that might be another challenge for reinsurers.”

Mr. Mailloux explained that if a smaller primary company that is a big buyer of reinsurance gets bought out by a larger carrier, “the end result is that on a combined basis they need less reinsurance, and that narrows the customer base.”

He conjectured that if the primary market gets soft enough, it could come full circle. Looking back at the soft market of the late 1990s, which he characterized as “years that were particularly bad for this industry,” he said the trend was one of reducing cession rates and thus reducing reinsurance.

“The cycle got so bad at one point, the trend was reversed,” he said. “It's almost like insurers were deciding they didn't like the business at what it was being written at, and they ceded more and more of that business to reinsurers.”

But that didn't turn out so well for the reinsurers, he recalled.

“The business that was ceded–or at least the terms at which that business was ceded–was very much unprofitable for reinsurers,” he said, explaining that if the underlying business the insurer was writing “had a loss ratio of 80 percent, the terms at which they ceded the business ended up being a 100 percent loss ratio for reinsurers, and left a loss ratio of 65 or 70 percent for insurers.”

As a result, during that period, he said, it is possible reinsurers essentially prolonged the soft market by providing cheap capacity.

“We're at a point where I think in the next couple of years reinsurers will be tested,” Mr. Mailloux warned. “If there is a trend that reverses toward ceding more of the business, and more of the business that is being ceded is at unprofitable terms, then the reinsurers will need to stay disciplined as they have so far, and resist providing cheap capacity in the form of reinsurance.”

Brian Boornazian, president of both Aspen Re and Aspen Re America, observed that the market is softer than it was during Jan. 1 renewals. “On the positive side, it's been a relatively modest softening,” he said.

He said it's encouraging that “for the most part, terms and conditions remain fairly unaffected, staying relatively steady.”

In the last hard market, Mr. Boornazian recalled, reinsurance carriers were able to make money “almost by just being in the market. That's a generalization, but the tide was high and all boats rose.” By contrast, in the current soft market, “real underwriting capability will make the difference of whether you make or lose money.”

He added that underwriting strength should prove to be an interesting factor, “because soft markets always serve to separate true underwriting companies from those that are market players. We're at a point now where that separation is going to start to take place.”

Interestingly, he added, past results may not be an indication of “who has the better underwriters.” This is arguably the case, he said, because companies that may not have performed as well in the previous hard market “are actually the ones who had the experience-savvy underwriters, who were mitigating some of the risk factors and trying to protect against the larger, extreme events in the post-Katrina environment.”

He said that because these underwriters were actively protecting the balance sheet, their returns may not have been as high as companies that were not as worried about mitigating potentially volatile losses.

He also noted that many primary carriers are lowering prices to their customers at a rate “that is outpacing what the reinsurers are willing to do, so far.”

One reason for this, he said, is that primary carriers are generally more decentralized than reinsurers, meaning that reinsurers can more easily “get the message to the troops” about underwriting than can primary insurers.

Furthermore, he added, catastrophe models have become an important part of underwriting, thus it is often easier for reinsurance outfits to recognize the benefits in terms of pricing because reinsurers are “writing fewer programs, with fewer underwriters involved.”

Primary carriers, on the other hand, may write “thousands of policies with hundreds of underwriters in the field, dealing with their producers. It's a tougher job to instill proper underwriting discipline,” he added.

What will the impact be on the market? One obvious determinant would be a major catastrophe, he noted. Another consideration is continued low interest rates, affecting investment income and pressuring insurers to make more money on underwriting.

Indeed, given current macroeconomic conditions, “I don't think they'll allow for the market softening to be quite at the level we saw in the late 1990s,” he said. “There's better capital management going on than in the past, so there may not be as big a need to feed capital as before.” This could shorten the duration of the cycle, he added.

Meanwhile, primary insurers offering greater rate cuts on their business than they are seeing from reinsurers are in a tough situation, he said, as they must decide whether to retain more to mitigate the differential. “That's difficult,” Mr. Boornazian said, “because it was only Katrina and post-2005 that most buyers took increased retentions to make up for the significant rate increases they were paying.”

As for July 1 renewals, he said rate decreases vary by line. “In general, on our casualty book, we're seeing rate decreases in the 5-to-10 percent range in the U.S.,” he reported.

However, for some accounts, rate cuts up to 40 percent were pitched, he noted. “While we opted to nonrenew these accounts, it does possibly provide evidence of some na?ve capacity in the market…It did show us that there are some crazy rate decreases…”

Steve Skowronski, managing director of the insurance and reinsurance practice with SMART in Devon, Pa.–which advises insurers and reinsurers in a variety of situations, including M&As and startup ventures–said the current renewal season is “more favorable than the Jan. 1 renewals because of a few things.”

For example, he observed, because losses have been low on the property-catastrophe side, “those lines of coverage are favorable from a buyers' perspective.” He said there are modest price decreases on the noncatastrophe property side as well, adding that the property area in general is seeing the sharpest price decreases.

“The other side of the hard and soft market is the terms and conditions,” said Mr. Skowronski, noting that terms and conditions are more stable than pricing, which is “still very much acceptable from the reinsurer's perspective,” he said.

The other piece of the picture is supply and demand for reinsurance coverage. “Basically, the demand from buyers, or cedents, continues to be less than the capacity,” he explained. “This means favorable conditions for buyers because of less demand versus the supply.”

The fundamentals that drive a soft market, he said, haven't really changed over the course of the first half of 2008, carrying over conditions from 2007.

In terms of the supply and demand, some alternatives–such as larger companies sponsoring catastrophe bonds–are still being used for some large property exposures. He estimated that between 10- and 30 percent of the large property markets are still being covered by cat bonds.

“There are mixed sentiments on whether that will continue,” he said. “One opinion is that since the more traditional reinsurance markets have favorable buying conditions, people may stay away from alternative markets, such as the equity markets, and use the more traditional reinsurance approach.”

He said that others believe the capital markets are here to stay, and will remain stable in the foreseeable future.

Captive insurers, another part of the alternative risk-transfer equation, may not be utilized as much by risk managers setting up their own reinsurers during a soft insurance market because of cheaper coverage from primary carriers, he pointed out.

“But that being said, the value of using the captive is always there,” he said. “The value of keeping some of the profits, rather than giving them to an insurance or reinsurance company, from a corporate perspective is always attractive,” especially with reinsurance prices on a downward trend.

Looking at sectors or lines of business, he said that in general, what happens in the reinsurance markets is a delayed reaction to the primary markets.

“For example, in the primary market, the property business was the first to harden,” he said. “So when it transcended to the reinsurers, reinsurers' rates for property business hardened–both pricing and terms and conditions.”

Mr. Skowronski added that the property market previously hardened first on the primary side and the reinsurance market followed. He observed that casualty softening is now beginning to bleed into reinsurers' results.

“So they've been getting less for property, but now they're getting less for casualty,” he said, adding that although workers' compensation has seen some large rate reductions, “interestingly, [directors and officers] has remained relatively stable. So far, there has not been a lot of impact on the reinsurers from the credit crisis.”

He continued that “the thought is, [credit woes] won't transcend into the reinsurance markets at least until 2009, because if you put reinsurance aside, the primary companies that have these exposures are still getting their arms around what their real exposures are.” He said the credit crisis may impact reinsurers more as the primaries begin to quantify their exposures.

With the projected favorable market for reinsurance buyers, he said reinsurers facing revenue losses will “couch that with, 'We're going to lose revenue because we're practicing disciplined reinsurance underwriting,' where management is concerned.”

For primary carriers, he noted, benefiting from the softening reinsurance market means not giving away as much premium.

“It's pretty obvious, what hurts the reinsurance market helps the primary market, although today, many companies feel both sides of that,” he said, explaining this is often the case because larger companies have both cedents in their legal group of entities as well as reinsurers, which can mute the impact corporatewide.