A global shortage of capacity is making retrocession cover unavailable or very expensive for some insurers to buy.

Sellers of retrocession cover - effectively reinsurance for reinsurers - are negotiating huge rate rises of up to 1,000% and tighter conditions on contracts.

The effect will be to drive up costs for all other insurance.

A director at broker Camberford Law, David Ottewill, said the lack of capacity was so acute his company was unlikely to be able to place risks for new customers.

He said: "If you're a large existing customer, we would look at it, but we wouldn't be certain of providing anything for you."

He said there was a lack of capacity even before the huge losses from the September 11 terrorist attacks which exacerbated the problem.

Faced with enormous bills, retrocession firms will have less capital against which they offer cover.

Standard & Poor's director Stephen Searby said: "There is capacity, but it depends what price you are prepared to pay. Anecdotal evidence would

suggest both the reinsurers and writers of retro are sitting on their hands waiting for the dust to settle to see where the premium rates will come out."

He said in addition to a genuine lack of capacity, some firms could be cynically withholding retro cover while prices keep rising.

The most important factor restricting capacity was uncertainty.

"Companies are looking at their business plans for 2002 and they don't know how much business they should write or will be allowed to write.

"The uncertainty in the equity markets doesn't help because it pushes up the cost of capital," he said.

Brokers would increase prices for primary insurance and reinsurance as the cost of retrocession cover increased, Searby said.

Munich Re, the world's largest reinsurer, expected both higher prices and new conditions designed to minimise losses to retrocessionaires on contracts which were now being renegotiated ready for renewal on January 1.

A spokeswoman said: "The risk situation changed completely because of September 11 so we are discussing how to deal with it.

"We have to completely rethink how to handle these risks and negotiate different conditions.

"Terrorism is hard to estimate and research. Rates will be higher but how much higher depends on the other conditions."

Ottewill said customers would seek alternatives to retrocession cover, such as setting aside cash

to cover losses and taking extra risk prevention measures.

Bill Riker of Bermuda-based Renaissance Re said he was aware of deals where rates were becoming "multiples of the old price" but suggested it was unclear whether such huge rises were enough to cover the risks involved.

He added: "Covers that were hugely underpriced are improving to a reasonable price."

He said increases of 1,000% were "not impossible" on specific contracts.