MONTE CARLO, Monaco—The continuing soft reinsurance market may be the norm, according to Martin Sullivan, deputy chairman of Willis Group Holdings P.L.C.

Speaking at a breakfast event at the Rendez-Vous de Septembre in Monte Carlo, Monaco, this month, Mr. Sullivan said that, barring a “financial Armageddon,” reinsurers may have to deal with a marketplace where hardening occurs only in certain geographic areas or in certain lines of business.

“We all have a tendency when thinking about the market cycle to look at previous market cycles and presume that the same patterns will emerge again,” he said. “I am not so convinced that the historic market cycle movements will be repeated again—in fact, I suspect that the "market cycle' has actually broken down into a number of subcycles.”

He noted that previous hard markets occurred when there were reductions in industry capitalization and short-term problems in rebuilding and accessing new capital. But improved actuarial and catastrophe modeling have attracted longer-term capital to the market, he said in the keynote speech at the PricewaterhouseCoopers L.L.P. breakfast.

Mr. Sullivan said the current levels of overcapitalization in the industry could be reduced by poor investment returns and losses.

For example, the industry can expect to pay out $50 billion in catastrophe claims during the next two years, he said. In addition, he said that it is hard to believe that investment returns this year “will be anywhere near those” of 2009 and 2010.

“2012 is going to be a very, very interesting year,” Mr. Sullivan said. If reinsurers continue to operate in a soft market, the question is where they can find growth. He predicted that next year would feature more merger and acquisition activity.

Mr. Sullivan warned his audience that “we should not underestimate the potential” for another financial crisis.

“Globalization and technology have linked markets and economies throughout the world,” he said. “The insurance and reinsurance markets do not stand in splendid isolation—they are interconnected and heavily affected by the global financial markets. The growing sophistication of modeling techniques and capital markets products may have kept the spigots open in some markets while closing them in others. But the combination of abundant natural catastrophes with, for example, a significant debt crisis and inflation would still have the power to dramatically shrink capacity, resulting in an insurance crisis.”

He said if reinsurers face inflation and sovereign debt default together, “all bets are off,” as these events still could trigger a global hard market that would affect all lines of insurance and reinsurance.

“But barring this type of financial Armageddon, the current levels of overcapitalization may be reduced by losses or poor investment returns, but that should not return us to the bouts of capital starvation that drove market behavior in some of the earlier hard markets,” he said.

During a question-and-answer session after the speech, Mr. Sullivan was asked what the next big liability issue might be.

He responded by noting that “rarely” does he go down a street anywhere in the world without “seeing somebody with something in their ears,” and that the next big liability issue could involve hearing.

“I worry about the number of things that go into ears these days,” Mr. Sullivan said.