MONTE CARLO, Monaco--Following two benign loss years in 2006 and 2007, strong capitalization in the primary insurance and reinsurance industries has lessened demand for retrocessional coverage, market sources say.

Much of the available retrocessional reinsurance capacity takes the form of industry loss warranties and insurance-linked securities, such as catastrophe bonds, said David Priebe, chairman of global client development at New York-based intermediary Guy Carpenter & Co. L.L.C.

Cat bond record streak over

"After 2005, catastrophe bonds set three record years of increased issuance," said Mr. Priebe. The market has stabilized, as "the past two years have been phenomenal years for the market and helped rebuild the balance sheets," he said. "2008 is probably the first year since Katrina (in 2005) that we won't set a record in cat bonds."

Industry loss warranties, known as ILWs, are contracts triggered by marketwide losses that usually are purchased to protect earnings on treaty business. For example, a reinsurer might purchase an ILW for market losses that exceed $10 billion in a certain cat-prone region.

For some ILWs, prices are increasing, sources said.

Caution is driving price increases in some industry loss warranty business, such as Florida, said Hans-Dieter Rohlf, managing director of North American treaty business at Hannover Re Group. "ILW movement shows stability or even rate increases, due to general fear and the number of hurricanes," he said.

The average attachment point for catastrophe programs is a $5 billion market loss, Mr. Rohlf said.

He is seeing "an increased demand for sideways protection," in which insurers absorb the first or second cat loss net of reinsurance but have reinsurance protection for a third or fourth event. What's driving this interest is fear of greater cat frequency, he said. "In 2008, U.S. tornadoes had enormous frequency--that wasn't there before," Mr. Rohlf said.

Unlike insurance-linked securities such as cat bonds, ILWs can be drawn up quickly.

"What clients love about ILWs is they're very fast and easy to execute," Mr. Priebe said. One client seeking $150 million in protection for earthquake risk was able to get an ILW bound and documented in 24 hours, he said.

While the market for ILWs grew in 2005 and 2006, "it has leveled off at about $6 billion," Mr. Priebe said.

Insurance-linked securities have to be "seen as part of the overall strategic capital execution" and are multiyear in nature, said Mr. Priebe. "Reinsurers are more sophisticated at understanding their portfolio and are more comfortable in taking basis risk."