Smaller reinsurance firms may have to amalgamate to survive tough economic times, a major conference heard yesterday.

And new markets — like the risk of conventional terrorism, particularly in the US — and China could create new demand for insurance products.

Kean Driscoll, chief executive officer of Bermuda-based Validus Reinsurance, said: “It’s becoming more and more difficult to be a small player, whether in Lloyd’s or Bermuda... I continue to see that trend developing, which leads to a trend for consolidation.”

Mr Driscoll added that companies should be concerned about shrinking “to the point where we become irrelevant” — and predicted some smaller firms would “lean towards mergers and acquisitions as a solution”.

But he added it was “a real balancing act for firms to decide how big they should be.”

Mr Driscoll added: “We are of the view that, as I mentioned earlier, that the industry needs to create demand.

“One of the obvious markets is conventional terrorism, particularly conventional terrorism in the US.

And he said the industry as a whole had committed “a substantial amount” of resources over more than a decade to understand conventional terrorism risk.

Mr Driscoll was speaking at the eighth annual Bermuda (Re) insurance Conference, organised by accountancy firm PwC and rating agency Standard & Poor’s.

He was part of a panel discussion on the first day of the conference which looked at whether the reinsurance industry had become “a victim of its own success” and whether the business stay aloof from changes in the market or take advantage of an influx of third-party capital.

But Ironshore chief executive officer Kevin Kelley said that he had regularly heard over the years that major mergers would take place — but that it had never happened.

He added: “There is no right size — there are a lot of companies bigger than us but we believe we can compete effectively with them because we’re heavily focused on what we do and we have influence on what we do.

And Mr Kelley counselled against a rush to mergers and acquisitions for the sake of it.

He said: “Consolidation has to be good for both parties. Consolidation I think, to be successful, has to create some sort of leap for both companies in order to be a positive game changer.”

Earlier, the panel discussed the growth of alternative capital in the reinsurance market, like insurance linked securities.

Mr Kelley said: “We welcome additional capital coming into the reinsurance marketplace, providing it stays in the reinsurance marketplace.

“Whether you call it alternative or whatever name you want to attach to it, it’s new capital coming into a very significant area of the market.”

He added his own firm had launched an innovative new syndicate at Lloyd’s of London, backed by capital provided by Lloyd’s Names.

Mr Kelley said: “So whatever you wish to call capital, you can debate the name and the reason it’s coming into the marketplace, the relevant point is it’s new capital.”

The panel also agreed that Asia — particularly China — could also bring new business to the table.

Mr Driscoll said: “There is a tremendous amount of value in parts of China, where earthquakes present real challenges.”

He added he had recently visited India, Hong Kong and China and that, while all were different, most foreign markets required “persistence and determination.”

Mr Kelley, who said his firm was likely to open a Hong Kong office next year, said: “That region changes — it changes even as we speak, so you have to be very committed to build a business there.”

He added: “Most of the Chinese insurance companies are clearly beginning to develop a closer focus on the West. When I started going there only three years ago, that clearly wasn’t there.”

And he said: “We will see how that evolves — my guess would be it evolves slowly, particularly because most Chinese insurers are very cautious.”

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