Even before the Asian tsunamis hit, 2004 was the costliest year on record for insured losses due to natural disaster says Standard & Poor’s. However, the reinsurance industry should be able to absorb these events, it says.

The ratings agency released its Global Reinsurance industry report card today.

It the report S&P notes that the series of hurricanes in the U.S. during the third quarter were the biggest factor in generating insured losses. It adds that most reinsurers should not have been caught off guard, as “a stormy tropical season had been predicted.”

The impact of 2004’s natural catastrophes varied across the industry, it says. “Some of the larger losses were suffered by those groups that had material U.S. primary insurance operations: for instance, Lloyd’s, Renaissance Reinsurance Ltd., and Hannover Re, which announced losses of £1.3 billion (US$2.5 billion), US$0.5 billion, and US$0.4 billion, respectively. On the whole, however, despite the headline loss, the reinsurance industry emerged relatively unscathed from the hurricanes,” it says.

Apart from the natural disasters, the industry also faced New York Attorney General Eliot Spitzer’s investigations into issues of brokerage commissions and financial reinsurance; and, adverse reserve development primarily in the U.S. Casualty business. “There is, of course, an element of unpredictability in all these events. However, none should be considered to be outside the bounds of the possibilities captured by a reinsurer’s normal risk management capabilities,” it says. “Consequently, the reinsurance industry, whose raison d’être is covering the unexpected, should have taken – and largely did take – these events in its stride.”

S&P says that the biggest risk facing insurers is the “cyclical downswings in pricing to often uneconomic levels.”

Based on evidence from January 1treaty renewals, S&P notes that “while reinsurance premium rates are still softening, the declines remain orderly–generally in the region of 5%-15% for loss-free accounts. For loss-affected accounts and Caribbean risks, generally rate rises of up to 35% have been achieved, but obviously this is only a small subset of the industry.”

The ratings agency says that pricing pressure won’t likely be a problem until late 2005. “The critical issue is whether further declines can be halted in 2006 when prices, on their current downward trajectory, will begin to test the rational levels of returns.”