Edward J. Noonan provides his perspective of the US marketplace.

The world has changed for reinsurers.

For the better part of a decade, reinsurers have grown at a faster rate than their customers, primary insurance carriers. This phenomenon is not sustainable, and over the next several years the reinsurance industry will grow at a similar rate, or perhaps even lag behind the growth of direct insurers.

This new market reality is being driven by several factors. The first is a shift in buying patterns and demand for reinsurance resulting from the extraordinary capital growth among direct insurers. Increased financial strength has allowed cedants to sharply increase their net retained liabilities, as well as move from proportional to excess of loss reinsurance. At the same time, the available supply of reinsurance has grown, leading to more aggressive pricing in most classes of reinsurance.

While the reinsurance industry had exhibited strong discipline in pricing and underwriting since the mid-1980s, this discipline began to erode several years ago. We have already witnessed the inevitable reserve increases, reinsurance underwriting activities, and management changes at several reinsurers, with more to surely follow.

Historically, reinsurers have provided insurance companies with risk management, risk financing, and capital enhancement and protection through traditional reinsurance arrangements. Today, however, some reinsurers are increasingly utilizing investment banking concepts to help clients manage their business and achieve their goals. As the lines between the reinsurance industry and the capital markets continue to blur, it is critical for reinsurers to broaden their capabilities and scope, employing capabilities and technologies from the capital markets to further meet clients' needs and strengthen business partnerships with them.

Increasingly, reinsurers must have capabilities in asset management, insurance risk securitization, dynamic financial analysis (to help clients better understand the effects of proposed business strategies on their future financial condition and results), direct investment, capital formation and integrated risk management (including interest rate, credit, foreign exchange and other financial risks). Such expertise and capabilities are no longer nice-to-haves; they are a reinsurer's commitment to meeting its clients' needs and the blueprint to its future success.

We are on the threshold of an era when businesses will be able to transfer almost any class of risk that can be hedged in the financial markets, through seamless (re)insurance products. Those companies that are entrenched in traditional approaches to risk management and unable to change will face an uncertain future. Those with management talent, vision, a clear identity, and a strong capital base will be able to tap the enormous opportunity.

Edward J. Noonan is president and ceo of American Re-Insurance Company and American Re Corporation.