Most reinsurers have far more capital than a year ago, capacity is abundant, but problems lie ahead for the marketplace, one reinsurance brokerage predicted.

“Falling business production and rising expense ratios are concerns for both insurers and reinsurers,” said the New York-based Holborn brokerage in its report, “2010 Reinsurance Outlook: A Balanced Market.”

Holborn added that depressed levels of employment and economic activity are producing flat or declining exposure bases.

“Market premium volumes continue to shrink, both due to reduced exposures and increased levels of price competition among insurers,” according to Holborn.

The report said Holborn expects reinsurers to buy back shares, merge, or both to manage capital during the year ahead.

Holborn's study noted the reinsurance market showed “a fair amount of stress” at the start of 2009, stemming from large loss activity and the financial meltdown in 2008.

“There were several large losses in the market, including Hurricane Ike, which we estimate as one of the three largest losses to the market ever,” the report said.

In the U.S. reinsurance market, Holborn noted that in January 2009, contracts with rate increases “significantly outnumbered” those with decreases. Rates increased again for second-quarter renewals, according to the report, but then began to subside by July 1, 2009. By late 2009, “much of the pressures had eased,” said the broker.

Some factors leading to the reversal, according to Holborn, were:

o Strong half-year earnings for many reinsurers.

o Improvements in financial results stabilized ratings for XL and Swiss Re, while Transatlantic Re was successfully spun out of AIG.

o Reduced anticipated catastrophe model estimates.

o Reduced premiums and less desire among ceding companies for limit increases due to the recession.

o The weakening dollar and relative strength of the euro, Swiss franc and British pound.

Now, most reinsurers have “far more capital than a year ago,” according to the report. “Catastrophe experience has been benign this year to the worldwide market, with no individual event costing reinsurers over $1 billion. Equity and currency markets have recovered about half of their 2008 and early 2009 losses, and the credit market has reopened for financial institutions.”