OREANDA-NEWS. Fitch Ratings says 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.

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, 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.

Global brokers, centralised purchasing by larger primary insurers and higher operating costs driven by regulatory requirements, are three factors supporting greater reinsurer scale. Intermediaries increasingly favour reinsurers capable of writing multi-peril programmes, while primary insurers increasingly purchase reinsurance centrally. 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.

We support the view that scale and diversification are attributes that are likely to improve reinsurers' longer-term fortunes in the future sector landscape. However, 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.

We maintain the view that the drivers of the current pricing cycle extend beyond a low major-loss claims burden. 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.

If loss activity remains unchanged, we expect further price softening for 2015 renewals. The higher weighting of non-proportional catastrophe business that is re-priced in April, June and July raises the possibility of 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.