“We know, decidedly, what won't surprise the market, and that is a Gulf of Mexico/North Atlantic hurricane,” he said. “We have been modeling North Atlantic hurricanes ad-nauseam since the experiences of 2004 and 2005.”

Like an unexpected terror event or earthquake, “a truly exceptional event in the $100 billion range or higher—be it a hurricane, earthquake or man-made disaster—would surprise the market [and] cause at minimum outlier reinsurer failures,” Mr. Flandro said, adding that such an event would also fuel “a sustained turn.”

CAPITAL QUESTIONS: RETURN OR DEPLOY?

Turning his attention squarely to the subject of insurer capital levels, Mr. Flandro suggested that primary insurance company managements should resist pressure from the investment community to return capital to shareholders.

“We have found by studying the spreads of forward returns-on-equity over weighted average costs of capital that most of our primary clients should retain capital and underwrite strategically, even in a softening environment,” he said.

“We advise our clients to optimize their capital deployment and maintain critical mass,” he said. “With the right tools, the right access to contingent capital and the right advice, our primary clients can trade through the current softening market and emerge with critical mass when the hard market does eventually come.”

Separately, last week, Towers Watson, a New York-based reinsurance broker, put the current level of reinsurer capital over $300 billion.

Bill Eyre, managing director, said reinsurers' surplus for the top 40 global players was roughly $315 billion at year-end 2010, representing “a new high-water marker for reinsurers' capital levels.”

Record capital and the absence of major catastrophes last year were among the factors that pushed Jan. 1 property and casualty reinsurance renewal premiums down as much as 10 percent, Towers Watson said, characterizing the renewal season as “one of orderly rate softening.” (See accompanying chart for a sample of price changes by segment.)

Looking ahead, Towers Watson said it expects that reinsurers' capital bases “will grow moderately—despite continued share buybacks—which would suggest a further increase in excess capacity,” barring major catastrophe losses in 2011. The firm added, however, that “there are signs that excess capacity will not necessarily be fully deployed in 2011 and will likely stay on the sideline awaiting a market turn.”

RESERVE CUSHIONS SHRINK

Turning to the final hot topic discussed by experts in assessing Jan. 1 renewals and overall market conditions—loss reserve adequacy—Mr. Flandro said Guy Carpenter believes the industry has entered the “cheating phase.”

“It is possible to show calendar year releases, even as accident year deficiencies begin to emerge, which we think they are,” he said, going on to cite two examples.

First, he noted growing levels of calendar year releases in Bermuda.

The favorable contribution to Bermuda reinsurers' loss ratios from reserve releases recorded so far for 2010 has been 8.8 percentage points—a full percentage point more favorable than in 2009, he reported.

“In this sense, deficiencies seem farther away than many thought, but if you look at U.S. p&c statutory accident year loss data you can see clearly that accident year 2008 has already begun to develop adversely (albeit including mortgage indemnity business).” In addition, he observed that accident year “loss ratio picks are getting progressively higher every year.”

Mr. Flandro also noted that first-year incurred-but-not-reported percentages are back down to around 30 percent, which he said indicates a level of conservatism consistent with the last soft cycle.

“So the question becomes where exactly are these releases coming from and are they really merited,” he said. “Are reserve releases propping up underwriting to a point where lackluster investment yields can be offset, for example?”

There is a good chance that we will look back 10 years from now and say “that is where it all began to go wrong,” he concluded. If history is any guide, he said, “underreserving is one of the industry's largest challenges, if not the largest challenge. At this point in the cycle, this should be borne in mind with increasing urgency,” he said.

Towers Watson's Mr. Eyre said his firm expects reserve redundancies to continue to decline is 2011. “We would expect that this will become a more dominant factor in 2012 that could potentially reverse current supply-and-demand dynamics,” Mr. Eyre said.