Benfield says only "significant removal of capital" will harden market.

Reinsurance rates will harden in the January renewal season, according to broker Benfield.

Rates are finally hardening as reinsurers try to soak up losses from natural catastrophes, such as hurricanes Ike and Gustav, and from investments affected by the credit crisis, the Benfield report said.

This could kick-start a hard market in the general insurance sector.

“The onset of global recession and associated increase in cost of claims could act as a catalyst for both insurers and reinsurers alike. As always in the reinsurance market, only significant removal of capital will harden the market,” said the Benfield study, Capital Consequences – The Billion Dollar Question.

Gustav and Ike are set to be the most costly catastrophe events of 2008. Estimates of damage from Ike continue to rise and losses are likely to top the $14.1bn (£8.9bn) cost of hurricane Ivan, which would place Ike fifth in the global list of the most costly insured catastrophe losses.

Investment losses have hit the reinsurance industry too. Property and casualty balance sheets tend to be invested in high-quality investment-grade fixed-income securities, but this has not made reinsurers immune to the collapse of financial institutions, increased volatility in foreign exchange and falling stock markets.

Losses are unlikely to be recouped quickly as companies set about “de-risking” their balance sheets by investing in more conservative instruments that produce lower yield. Some reinsurers exposed as much as 19% of their portfolio to equities.

“The report looks at the impact of events in the third quarter on balance sheets of reinsurers,” said Angela Coad, a member of Benfield Research.

“Hurricane Ike and poor investment returns have left their mark but it may be the fear of restricted markets as much as the increased cost of capital that constitutes a market-changing event.

“Reassessment of risk is likely to increase demand from insurers and the same forces may restrict its supply.”