Unlike these positive forecasters however, Mr. Ehrhart, looked at the first factor--a disappearance of insurer cushions of capital--and a very long list of additional demand drivers and weighed them against a shorter, but formidable list of impediments. This led him to conclude that insurers may continue to increase their retentions going forward.

Referring to the optimistic commentary from reinsurers, he said, "There has been speculation that there will be a bull reinsurance market," which caused reinsurance company stocks to react favorably recently. The "premature rally," however, has already "come in some," he said, attributing the short life of the rally to the realization of "a disconnect" between buyers and sellers.

Going on to describe what he meant by the term "disconnect," Mr. Ehrhart said reinsurers are also suffering reasonably significant capital declines.

"If you buy more reinsurance, who are you going to buy it from?" he asked.

"Intuitively, the right risk management move when capital is down from the supplier of risk-taking capacity is that you buy less ... from them. That's general fundamentals," he said.

Earlier in his presentation, Mr. Ehrhart presented numbers showing that insurer capital declines have been steeper than reinsurer declines.

Overall, a group of insurers he tracked, which had $366 billion at the end of fourth-quarter 2007, lost 19.4 percent of their capital by the end of third-quarter 2008.

On the reinsurance side, capital fell only 8.2 percent in the same period for a group of reinsurers that had $360 billion in capital as of fourth-quarter 2007. But while some large companies, like Berkshire-Hathaway, had no capital change, others have suffered "reasonable declines" that will get the attention of ceding companies.

Three of the larger reinsurers have capital drops ranging between 15 and 20 percent through the third quarter, he said, without identifying them. "While that's better than we're going to see for a lot of insurers, it is material enough that it's not going to go unnoticed," he said.

There are significant reinsurers that "are possibly even facing control changes or other uncertainties," he said.

In addition, reinsurers that "qualified on the margin last year" for the reinsurance programs--in other words, who just hit cedents' credit quality thresholds with ratings of "A-minus" from A.M. Best and "BBB-something" Standard & Poor's--now have lower capital cushions than they had last year. That means "clients are going to be more cautious about buying from people with those ratings," he said.

"And then there's the price," he continued. There's been a lot of talk about insurance prices stabilizing, but not necessarily any indication that "new money is flowing in the door" from insurance rate hikes.

Speaking from the perspective of an insurer, he asked, "How am I going to spend more going out the door" to buy the higher levels of reinsurance protection "without more coming in the door?"

That will cause insurers to wait--"if they're going to buy more, to do it after they see the money flowing in."

In efforts to increase the inflow of dollars, insurers may try to grow their business in 2009, but "there's real growth risk when there is real competition on the Street for business," Mr. Ehrhart noted.

"While there is some $30-$40 billion worth of premiums in companies that have difficult economic circumstances in their own books, there's still competition for moving that business," he said.

On the reinsurance side, after two years of reinsurance price declines, insurers know that the cost of reinsurance is going up. Therefore, he concluded, "you are going to see people [cedents] defeating some of that price increase with raised retentions."

This is counterintuitive, since lower insurer capital levels should coincide with lower risk tolerance, he conceded. "I think it's probably something that will occur even though it feels unnatural," he said.

On the demand side, in addition to the disappearance of insurer cushions of capital, Mr. Ehrhart, a greater respect for model uncertainty, and a $12.0-14.5 billion shortfall in the Florida Hurricane Catastrophe Fund are factors working the opposite direction--potentially fueling more reinsurance demand in line with more bullish predictions.