Rating agency Standard & Poor's has placed the whole of the European reinsurance market on negative outlook.
It also said that reinsurers would have to raise rates by 10%-15% to "breakeven".
The decision to keep the market on negative was made even though the European reinsurance market is expected to remain hard beyond 2003. S&P said this was "due to uncertainty over the long-term sustainability of rate increases".
S&P's credit analyst Stephen Searby: "Rates on some lines of business have not yet reached a level where reinsurers will break even in terms of technical underwriting.
"To reach breakeven, rates need to increase by about another 10%-15%," he added.
S&P credit analyst Christian Dinesen said: "The negative outlook indicates that market trends will continue to exert downward pressure on the credit ratings on many reinsurers in the market, with rating downgrades more prevalent than affirmations or upgrades."
"Although Standard & Poor's is fairly confident that most reinsurers will reach a technical profit in the next 12 months, there are very real risks that competition will re-emerge before reinsurers have rebuilt their financial strength and are ready to face additional large claims," said Searby.
Searby warned, however, that given the current market environment, rate increases could be undermined by a resurgence in investment markets.
Continued depressed capital markets remain a key factor in the longevity of the hard market. Although European reinsurers are expected to remain consistent in their underwriting approach into 2003, S&P said that history has shown that falling costs of capital resulting from strong equity markets and low interest rates are important factors in establishing a softer premium rating environment.
