Fitch Ratings has said in a new report that merger and acquisition (M&A) activity within the global reinsurance sector is set to continue, as January 2015 renewal indicators point to a protracted soft market.
It said small may no longer mean perfectly formed for the shape of the future reinsurance market, with recently announced tie-ups featuring smaller/less diversified players seeking to merge with, or acquire competitors, to achieve greater scale and diversity within the broader merger rationale.
“Should the soft cycle be protracted,” the report said, “We believe that smaller, less diversified reinsurers will have a diminishing ability to decline unprofitable business, as they would risk eroding their position on a panel or market share.”
The report, titled Global Reinsurers Jostle for Position in Shifting Landscape, listed three factors supporting greater reinsurer scale: global brokers, centralised purchasing by larger primary insurers and higher operating costs driven by regulatory requirements.
“Intermediaries increasingly favour reinsurers capable of writing multi-peril programmes, while primary insurers increasingly purchase reinsurance centrally,” it said.
“Reinsurers have seen a rise in fixed costs as they develop modelling and risk management expertise to manage oversight and reporting requirements for incoming risk-based solvency regimes, including Solvency II.”
The agency said it supported the view that having scale and diversification were likely to improve reinsurers’ longer-term fortunes, however it warned: “M&A solely to achieve increased scale and diversity could be viewed negatively if it was not apparent that the new larger entity would have a stronger market position in its chosen areas, and without compromising profitability.”
It also warned that the low major-loss claims burden was not the only driver of the current pricing cycle.
“The growth of alternative capital as well as changes in the purchasing and distribution of reinsurance products are other significant factors in reducing prices.
“While the elimination of some traditional capacity, be it through withholding or merger, will reduce oversupply, it is unlikely to create a floor for the current pricing cycle.”
Fitch also predicted further softening for 2015 renewals if loss activity remained unchanged, and with higher weighting of non-proportional catastrophe business re-priced in April, June and July, it rasied the possibility of even steeper price declines than for January’s renewals.
“Despite the challenging outlook, we expect pricing at the portfolio level to remain adequate for most traditional reinsurers throughout 2015.”
