The negative outlook indicates that the number of insurer financial strength ratings lowered over the short to medium term is likely to outweigh those that remain the same or are raised.

"Despite further price increases during the January 2003 renewal season, the market continues to suffer from a diminished quality of capital, reduced financial flexibility (defined as the ability to source capital relative to requirements), prior-year liabilities, the overhang of reinsurance recoverables, and the likelihood that many companies' operating performance will fall short of expectations," says S&P credit analyst Stephen Searby.

To compound the pressure on ratings, the hard market conditions of recent years have proved difficult for reinsurers to capitalise on. While participants need to rebuild and restructure their capital bases and put in place foundations to reduce future loss volatility, the ease of entry for new players and increased competition in the market have dampened the ability of existing players to recover.

Nevertheless, while the performance of the big four reinsurance groups — Munich Re, Swiss Re, Employers Re, and General Re, representing 32.3 per cent of the market — has been lacklustre.

"Many established Bermuda-based operations have fared much better than the big groups over the same period, and these in turn have been outperformed by the more recently formed companies," adds Searby. "The results indicate that the ability to write business opportunistically is a key competency for success, with those reinsurers that have been able to step in and out of business lines faring well."

By contrast, the larger groups, which have tended to be more relationship based, have been slower to move out of unprofitable lines of business and have perhaps been impeded by longer lines of communication. "While the intent of senior management in large organisations can be crystal clear, communicating the need for change and making it happen can prove extremely challenging," he says.

As the challenges faced by the market continue, recovery remains the watchword. The industry must build on the hardening of rates and tightening of other terms and conditions that started in early 2001. However, while rates in many casualty classes continue to rise, including workers' compensation, directors' and officers' and medical malpractice, there are already signs that certain sectors of the market have peaked.

"US property, global property-catastrophe, retrocession, and aviation lines have reached or passed their peak, leaving the sustainability of the improvement in terms and conditions subject to some conjecture," concludes Searby.