Previously, he said, if there was a major event, like Hurricane Katrina, reinsurers could “quickly reload with capital–go out and put together a sidecar or go and raise additional capital from the capital markets to augment their balance sheets.”

With today's credit crisis, however, reinsurers will have to “factor in a much higher cost of capital and the inability to reload post-event,” he said, noting that on top of this, risk tolerance levels are falling.

On the demand side, he observed, many cedents have had “much larger net losses” than anticipated, and have also had their capital impaired–particularly those with equities on the asset side of their portfolio.

Because of this, he said, their risk tolerance levels will be lower “and their faith in the models shaken. I would not be surprised to see some insurers lower their retentions, increase their limits a little, and, more importantly, buy more 'sideways' cover, or cover for frequency of events.”

He said that some insurers have gone through their retentions, as well as “two or three layers of their programs this year.”

For 2009, Mr. Rhoads said he sees cedents looking “much more closely at reinsurer security.” He said cedents will most likely watch out for reinsurers with “legacy liability” issues and “meaningful investment-sized losses.”

In light of what's going on in the financial markets, he advised buyers of reinsurance to ask some “very hard questions” and do far more due diligence than they might have done in the past.

Buyers are going to be “very interested in the security of reinsurers and having them come clean” with their current market capitalization, their surplus impairment, the performance of their asset side during the past year, the number of equities or hedge fund-related investments in the portfolio, and their cash balances, he said.

“And most importantly,” he added, “if I have a loss, are they going to be able to go out and obtain cash, or do they have enough cash on hand to pay for those losses–because you can't go out and raise it like you were able to in the past.”

While buyers may have relied heavily on broker recommendations and ratings before the current crises, “more than perhaps they should have,” now they will need to “form their own opinions and do some research,” he said.

Mr. Rhoads noted that many of the traditional reinsurers used by brokers for placements are “probably going to have to change and shift.” He observed that reinsurers that don't have “years and years of uncertain or legacy liabilities on the balance sheets and who were not aggressive on the asset side will probably end up being the winners.”

Andy Marcell, chief executive officer of Guy Carpenter's Americas operation, located in New York, agreed that “while storm activity has had an impact” on reinsurance pricing, “the biggest impact will be the financial catastrophe. That in itself has the power to reshape the market.”

At issue, he said, is that soft markets are generally a result of overcapitalization–which is less likely given the huge drops in investment portfolios of late. “Some of those invested assets would have been reduced by–and the returns on them reduced by–the financial catastrophe that we're experiencing,” he explained.

A consequence is that reinsurers will be looking toward underwriting results “as a core way to make money, rather than [results] being supplemented by investment returns,” Mr. Marcell said.

But even with these issues in play, he observed, “I'm not certain that it will force prices up. I think that's still an open question. But the pressure on increasing rates on the original business is significant.”

He added that on “the casualty side for reinsurers–the liability side–that pretty much follows suit.”

Mr. Marcell also predicted that the cost of capital will eventually rise. While there may be other outside factors–including more regulation, or increased capital charges on assets by regulators–causing capital to be more expensive, “all these factors are yet unknown, but the likely scenario is that the pressure on increasing rates is tremendous.”

He added that submissions will go out in the next eight weeks, “and then we'll start getting feedback from the reinsurers, and that's when we'll know for sure.”

In addition, the potential for a “mega cat” is still on everyone's mind, he said, noting that while it's expected that a major disaster loss would consume capital and drive up rates, “here you have two very manageable hurricane losses and you have this unprecedented financial catastrophe–and we don't know how that's going to turn out.”

Insurers, he said, are also in the process of finding out if they had a Hurricane Gustav or Ike loss, and the impact on their investment returns–”depending on their exposure to a company that's been bankrupted, or whether the overall portfolio has deteriorated.”

Added to this is the worldwide reduction of interest rates, which also impacts insurance company investment returns. “So we don't know how it will all work though. If I knew the answer to that, I would be much in demand,” he said.

To get the best rates possible, Mr. Marcell advised reinsurance buyers to “provide full information, do tremendous analysis, articulate their business strategies like they never have done before, and be as detailed as they can about what their underwriting strategy and risk selection will be.”

Buyers, he said, need to “come across as the best partner in whatever space they're operating in for their counterparty, the reinsurer.”

While rates on the property side are typically set by exposure, on the casualty side “they may see a need to expand their limits to operate in a changed environment where demand may go up. Or they may decide now is the time to retrench and reduce their retentions.”

He surmised that the majority of buyers will leave retentions unchanged, while some may buy more coverage from the reinsurance market. “That will be driven by their financial model,” he said. “People have had several [models] in the last few weeks, and they're adjusting them constantly.”

Howard Stecker, senior vice president with SMART Business Advisory and Consulting in New York, said that in light of the current financial crisis, he has “not heard any of our [reinsurance] companies so far express that they are not going to renew or are going to clamp back with Jan. 1 renewals.”

However, with “all the problems with liquidity,” he said it remains to be seen “whether this has impacted the amount of capacity some of these companies really have to place.”

Because the market's been down, he added, “what it comes down to is that one of two things will happen. Either the direct writers will wind up holding onto more risk because they can't find the capacity at a price they're willing to pass along, or they're going to pay a higher price to tap into the reinsurance.”

It's anticipated, he said, that capacity will shrink because some capital previously accessible to reinsurers may no longer be available–as well as some of the alternative risk-transfer options used. On Wall Street, for example, he said one alternative has been cat bonds, which may have a harder time finding buyers in this volatile market.

What remains to be seen, he noted, is whether the price of insurance will rise–and even if it doesn't, “how much will insurers be able to buy?”

As for the impact of turmoil in the market, “you could get in a situation where people are nervous about placing with AIG or some of the other companies they've traditionally done business with,” he said. “We're seeing a shakeup in Europe right this minute…They're having some of the same problems we are, and several of the largest reinsurers in the world are European.”

To the extent that European reinsurers step back from some of the business they used to write, “would others step in and provide the capacity there? What kind of void would that leave?” he wondered.

Trish Conway, an actuarial advisor in the Insurance and Actuarial Advisory Services practice of Ernst & Young's New York office, said the softening market could turn in a hurry. “A careful eye needs to be kept on the evolving financial market situation as it has the potential to impact renewal season,” she noted.

Such uncertainty about which way the market will turn is even more pronounced for U.S. catastrophe reinsurance renewals, she added, especially since pricing has been falling dramatically of late.

“The big question is, will reinsurers hold their discipline and not let prices slip too much? Or will some reinsurers be less disciplined and try to expand their market share a bit?” she asked.

Ms. Conway said that while Hurricane Ike was probably not enough to shift the market's direction, it is a big event that will test the models, which “didn't hold up so well for the hurricanes in 2005″ and have been adjusted since then.

“The modeled estimates also don't cover Kentucky and Ohio, which were affected by Hurricane Ike, so the total impact of those losses remain to be seen. This area is outside the model range,” Ms. Conway added.