The influx of new insurance capacity to make up for losses sustained in the terrorist attack of 11 September has rekindled competitive pricing pressures and may limit the scope and duration of the current hard market.
Reinsurance broker Benfield Group said in a new report that the infusion of new capacity has outpaced WTC loss payments and, as a result, premium increases have not reached the "draconian" levels originally forecast.
Benfield Group chief executive Grahame Chilton said: "That's the good news. The bad news is that underlying the continued hard market are poor fundamentals, such as weak equity markets, a sagging global economy, lower interest rates and corporate bankruptcies.
"These together will reduce the investment returns of many insurers and reinsurers."
In its Reinsurance Renewal Season Report, Year End 2001, Benfield said new capital raised since 11 September stands at over $16bn (£11.3bn), of which $6bn (£4.2bn) has been channelled to five of the new Bermuda-based reinsurers alone.
Benfield added that renewals for 2002 have moved away from broad-based general coverage towards specific, risk-named perils and exclusion, rather than inclusion with stricter definitions.
The report said rates increased across the board from as little as 10% to as high as 300%, with cedants that reached the end of multi-year agreements on 31 December 2001 hardest hit.
The report said that rather than automatically excluding terrorism, the major European insurers assumed a flexible approach based on careful risk evaluation. Lloyd's syndicates, on the other hand, generally imposed a blanket exclusion, thereby losing business to European markets and Bermuda.
It added that the US market remains constrained by the lack of a legislated national solution such as a terrorism pool.
