XPRIMM: How do you estimate that the reinsurance global market will develop in 2016? What are the main challenges?
Guy HUDSON: The reinsurance market is experiencing a period of massive structural change, driven by the influx of new capital into the sector.  This is characterised by reduced cessions and smaller reinsurance panels, as well as steep price declines across most lines of business.

All of this is exacerbated by increasing regulatory requirements and rating agency charges, which have precluded carriers from using equities - their most useful hedge against inflation and low yields.

In 2016, Investment income for most players remains significantly below 2007 levels. A flurry of merger and acquisition (M&A) activity has taken place and reinsurers look to build scale and improve diversification in order to survive in the present environment.

There is no imminent prospect of a turn in the market, the sector participants are seeking ways to harness conditions and build successful business models for the future.

Capital suppliers have become increasingly attracted to the catastrophe reinsurance space and its relatively high returns and low correlations.

To compound matters, many reinsurance buyers began to cede significantly less. Premium cession rates fell from 14% in 2005 to 8% in 2014. There has been a consolidation of reinsurance panels, with some insurers using as few as 10 counterparties compared with more than 50 just a few years ago.  Reinsurance rates in certain market segments have fallen significantly and, barring a combination of events similar to those that led to the last hard market (i.e. the September 11, 2001 terrorist attacks, an equity market crash, a reserving crisis and a succession of US landfalling hurricanes), current market conditions are unlikely to change in the short term.

Alternative reinsurance solutions are now a permanent feature of the market. Buyers will also continue to benefit from heightened competition outside property catastrophe lines as new capacity offered in these classes puts incumbent players under pressure.

Indeed, the supply glut is now so large that it is estimated the impact of a $130bn loss (for example, following an event such as a powerful hurricane tracking across Florida and the US East Coast) is likely to be restricted to one or two property catastrophe reinsurance renewals.

Despite this, reinsurers' returns have generally not suffered since the onset of the soft market. This is due in part to favourable reserve development and also to a sustained period of good fortune given the very low insured catastrophe losses of recent years.

However, losses following the Tianjin explosions in China, hurricane Joaquin's fleeting threat over the US East Coast in September and October and hurricane Patricia's near miss in Mexico, were timely reminders that extreme events can strike at any time and this period of good  luck will inevitably end.

Reinsurers cannot continue to bank on reserves and low losses consistently to deliver strong results in the long term. Reinsurance buyers are therefore likely to continue to benefit from the heightened competition and innovation dominating the marketplace at present. There is a danger that the blurring of the lines between insurance and reinsurance may test strategic relationships in future years as primary carriers and reinsurers increasingly compete in the same spaces.

Laddered, multi-year cover is likely to remain popular as buyers take advantage of lower pricing in the near term while hedging against potentially higher pricing in the medium term. Demand for more complex multi-event or clash covers to mitigate the growing number of risks that have the potential to affect multiple territories and business lines (such as the Tianjin loss last year).

Reinsurance capital is increasingly compared directly to debt and equity capital as a source of finance as the cost of reinsurance falls relative to other capital sources.

Underwriting discipline is also becoming more necessary each day as rates are likely to be nearing technical minimums for certain lines of business, having fallen for 12 consecutive renewals. Large, diversified reinsurers enjoy certain advantages in meeting these challenges, namely larger balance sheets, a breadth of risk knowledge, established client relationships, innovative products and strong analytical capabilities.

Conversely, some - but not all - of the smaller and specialised companies face significant pressures to remain relevant. This has been a factor in driving sector M&A activity over the past 18 months as a number of players have consolidated. Nevertheless smaller, more nimble players capable of deploying capital strategically and utilising analytics as a differentiator within specific areas of expertise can continue to flourish.

This new market environment also requires reinsurance brokers to adapt their business models, tailoring the best cover and best structures for specific clients by providing expert and impartial advice amid the high number of traditional and alternative risk-transfer solutions on offer in today's marketplace. Offering bespoke, best-in-class analytics and advisory. They must provide services to help clients grow profitability into new lines and markets while also advising on  issues such as M&A opportunities, reserving risks and enterprise risk management in relation to regulators' and rating agencies' requirements.

Despite the challenging market environment, growth opportunities still exist. There was strong evidence of increased demand during last year's June and July renewals.  Efforts to accelerate the transfer of risk from governments to the private market are being replicated elsewhere at a time of strained public finances for many countries. Additionally, new and emerging risks are also likely to be major area of potential  growth in the future.

Estimates suggest the cyber market alone could triple in size over the next five years. Fresh thinking also needs to be applied to difficult questions surrounding new technologies such as driverless cars, cloud computing, 3D printing, the internet of things, nanotechnology, "sharing economies", drone proliferation and a host of other issues which will require risk-transfer mechanisms.

Finally, the largest "catastrophe" that has ever beset the industry may be in the early phases of rearing its head: long-tail reserving risk. It is likely buyers will, in the coming years, need additional access to casualty and liability reinsurance solutions. State-of-the-art modelling and best-in-class advisory services will be needed throughout to provide costed and effective solutions to risks such as these.

Intermediaries need to be ready to deliver cutting- edge analytical tools and bespoke solutions that can help develop the innovative products in this this rapidly changing marketplace.

XPRIMM: How do you see at this point the Romanian insurance market from the reinsurers` point of view?
G.H.: There is no doubt there has been some significant changes in the Romanian Insurance Landscape of late. The bankruptcy of ASTRA caused a major shock amongst reinsurers and has made those same reinsurers re-evaluate their relationship with the local Insurance community.

Issues such as late payments, bad debts and counterparty risk are at the forefront of reinsurers concerns.

Other decisions of the ASF have hinted at a fragility in the market which has reinforced the concerns of those reinsurers active in the Romanian market.

Reinsurers are aware that there could be higher levies and charges to cover the increased cost of bankruptcies, potential bankruptcies and increased supervisory/ regulatory action and this must all be factored into their decision making process.

Reinsurers are keeping watch for evidence of any legistlative changes or perceived political influence in the Insurance industry, especially in relation to the setting of motor third part liability rates and the rules relating to an Insurance companies ability to issue Motor Policies.

Reinsurers are looking to see if there is any movement towards Insurance companies operating on a Freedom of Service "FOS" basis perhaps on a Managing General Agency "MGA" basis. The rules regarding policy issuance have been changed to facilitate such possibility and this could affect the Motor TPL market in time. It is understood that at least one Bulgarian Insurer has indicated that they wish to operate on this basis.

Meanwhile, for those companies who can allay the fears of reinsurers regarding their credit worthiness, the market continues to be a buyer's market. Reinsurer's are looking to maintain their market share whilst their is a "flight to quality".

There is little evidence to say there will be any hardening of catastophe rates, in fact far from it and reinsurers will be more flexible in the reinsurance products on offer, covering multi-year, multi-class exposures either for an event or in the aggregate.

New original product concepts will be looked on favourably by reinsurers. The aim being to reduce their reinsurance reliance on the motor class of business.

2016 and 2017 will be, I am sure, a white-knuckle ride.