Despite severe losses during the 2010 first quarter, reinsurance rates are expected to remain soft through Jan. 1 renewals, but much depends on loss activity during the course of this year, two recent reports said.

Reinsurance brokers Aon Benfield and Guy Carpenter released reports on the marketplace this weekend, saying that while rates remain in decline, reinsurers are showing strain, and a significant loss event could trigger a turn around.

Aon Benfield observed, "Capacity continues to grow more quickly than demand despite capital management actions and some reinsurer consolidation."

Guy Carpenter called 2010 "a difficult year" for reinsurers, with losses reaching $23 billion over the first six months. But despite this and the forecast of an active hurricane season, reinsurance and insurance rates continue to "generally" decline through this year "as surplus capital drove down prices," Guy Carpenter said.

The broker noted that according to its calculations, reinsurance rates have fallen 6 percent on average through the renewal season. While Chile, because of a destructive earthquake earlier this year, saw increases, elsewhere rates were reduced.

The reinsurance sector was overcapitalized by as much as $20 billion, or 12 percent, at the start of the year, Guy Carpenter said. That dropped by 8 percent by June, but overcapitalization is still driving the direction of renewals.

Aon Benfield noted reinsurance returns have fallen 10-to-12 percent "and are now at levels where even small price reductions will materially impact overall profitability, fuel further share repurchases and ultimately drive more consolidation."

That trend will "decrease materially" the "10-to-20 percent reductions realized in June and July 2010," Aon Benfield said.

A market turn will not occur from a single loss event of $20-to-$30 billion, said Guy Carpenter. However, multiple losses in that range or a loss exceeding $50 billion "could see an immediate correction in pricing."

Without significant reinsurer losses for the rest of this year, Aon Benfield said capital and capacity will continue to exceed client demand and the current soft market will continue into next year.

During a panel discussion at the Monte Carlo Rendez-vous, Munich Re board member Torsten Jeworrek said Munich Re expects stable prices and conditions for its portfolio in the upcoming Jan. 1 property and casualty reinsurance renewals.

Currently, he said there is sufficient capacity in all lines of business and noted that rates have improved significantly in lines of business hit by heavy losses, such as offshore energy and natural catastrophe covers in Latin America.

Mr. Jeworrek added that the heavy losses caused by the earthquake in Chile have shown how important it is to ask a price commensurate with the risk, "even in years where losses are relatively light." He said Munich Re will strictly adhere to this line. "Our financial strength is our most important asset. Growth without profitability is out of the question," he said.

Additional reporting by Caroline McDonald in Monte Carlo