The reinsurance world has always been a bit arcane, but rarely to the extent it appears to be right now. Henry Keeling the president and CEO of Guy Carpenter’s international operations, noted at the European Insurance Forum in Dublin, that he’s been in the reinsurance business for 37 years, and “the losses in the first quarter of 2011 are the worst I’ve ever seen.”

Logically reinsurers should be trembling in their boots that, with the hurricane season about to start, there will be more big losses. Paradoxically, they don’t seem to be all that concerned. In fact, although “‘Tis an ill wind that blows nobody any good,” reinsurance brokers and reinsurers seem to be quite sanguine about the prospect that future ill winds may in fact blow the industry some good in the form of rate increases.

If  one or more hurricanes or typhoons cause extensive losses, they could trigger the long awaited turning of the insurance pricing cycle, as they would further decrease reinsurance capacity to the point that higher prices for coverage would become a viable option, if not a necessity.

“At the end of 2010 the reinsurance market had around $20 billion in excess capacity,” Keeling said; that equals about 12 percent of the market’s total capacity.” He estimated that the approximately $50 billion in Q1 losses has reduced that to around $10 billion; i.e. there’s now only around 6 percent of excess capacity in the market.

Capacity, however, is one of only a number of factors to consider when assessing the state of the reinsurance market. The CEO’s on the panel that addressed the issue cited the still fragile state of national economies in the developed countries, the extraordinarily low interest rates, coupled with meager investment yields, the consolidation of the reinsurance market, the increased demand from emerging markets, the changes in catastrophe models indicating higher loss figures, and concerns about the effect of impending regulatory changes, notably Solvency II in the EU, and what impact they may have on capital requirements.

Keeling predicted an “increase in M&A activity in both the primary field and the reinsurance field,” involving U.S., Bermuda and European companies. He also noted that not so long ago there were something like 400 syndicates at Lloyd’s, “but now there are only around 70.”

This “changes the manner in which reinsurance brokers’ relationship, not just with the markets, but especially with the clients,” he continued. “It used to be that the greatest value of the reinsurance broker was aimed at being the ultimate contact with the syndicate.”  They handled contract formalities, collected premiums and processed claims. “Nowadays the reinsurance broker is looking to be the strategic advisor to the client; the whole nature of the market has changed and will continue to change.”

Keeling also pointed out: “Typically in normal times roughly half of an insurance company’s net income, probably even more, comes from investment returns; now it’s all down to hard work in underwriting.” He also noted that the low rate of inflation may be ending, which would mean that, “although we’re still seeing positive reserve releases,” the situation could change. In that case more reserves could be required, and the releases would be curtailed. “We’re starting to see that move,” he said. “When the investment gains disappear, and the unrealized gains disappear, that can have a very significant impact in reinsurers’ and insurers’ balance sheets.” Their “excess capital could disappear quite quickly.”

In addition to capital disappearing more of it will be needed, as emerging markets increase their need for reinsurance coverage. Adam Mullan, CEO of Alterra at Lloyd’s, cited Brazil as an example. “It’s amazing, Brazil with a population of 190 million people, GDP growth this year projected at 6 percent, coming off four  or five years at 5 to 6 percent, that economy has stabilized, and they’ve got substantial reserves of natural gas and oil…agriculture, etc.” Brazil’s middle class “has increased from 30 million to 60 million in the last seven years. You look at these kinds of countries, and there are huge opportunities for our industry. A country like that offers great potential for future development.”

He discussed the role the reinsurance industry has played in opening up Brazil’s regulations, which until four or five years ago the IRB [Brazil’s government run reinsurer] “was writing around $4 billion in premium; today they’re writing around $2 billion… so there’s a great opportunity for people to get involved [in that market].”

Brazil isn’t a unique case. “75 percent of global GDP growth for the next 10 years will come from emerging markets,” said. Emmanuel Clarke, CEO of PartnerRE Global. “Fast growth like that needs insurance, not necessarily reinsurance, but commercial insurance.”

All of these factors will have an impact on what direction the global reinsurance market takes in the future. Another major loss could indeed trigger rate increases, but it will not do so alone, as reinsurers will weigh other considerations before they start asking their clients to pay more money for reinsurance coverage.