A major shake-up of the global reinsurance industry will get underway this year, industry experts have predicted.

Falling rates, improved terms and conditions, oversupply of capital continuing to outstrip demand and several years of little loss activity will mean more changes ahead, according to a report on the year ahead by London-based Willis Re.

The firm said: “Tiering of reinsurers is also gaining wider traction, putting real pressure on smaller reinsurers and mono line catastrophe writers, who have the additional burden of competing with the capital efficient and highly competitive capital market-backed funds and sidecars.”

And the report added that major mergers and takeovers were likely to accelerate as companies recognise that delays could lead to further deterioration in their valuations.

It said: “With only a limited supply of attractive target companies, consolidators looking for scale and diversification are moving as company valuations become more reasonable for both parties.”

Willis Re chairman Peter Hearn predicted: “In the current environment, many reinsurers recognise they can no longer hope for salvation through major market losses or increasing interest rates.

“Their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale. The new mantra is diversification.

“Whether this is by class or geography — preferably both — reinsurers are being actively rewarded by investors and buyers who see diversification as key to sustainability, along with size.”

But the report added that some reinsurers are not accepting wider terms and conditions in addition to reduced rates, while a number of buyers had given order prices above the lowest market rates to maintain relationships with trusted partners.

And it said that some firms were scaling back their portfolios and entering the new year with reduced budgets — particularly in the natural catastrophe sector — in a bid to resist aggressive pricing and terms and conditions.

In addition, the rush of hedge fund-backed reinsurers appears to have slowed, although that was put down to rating agency hurdles rather than current market conditions.

Willis Re CEO John Kavanagh said: “Yet again, buyers have held sway. Also adding to reinsurer woes are the predictions that the global reinsurance market is only just managing to cover its cost of capital in 2014 and may fail to do so in 2015.

“Arguably, the continued lack of demand and oversupply of capital can only keep driving pricing down. Unlike other financial markets, the reinsurance market lacks inherent depth, with no structured secondary trading market to help absorb the excess capacity. As a sector, we need to create depth.”

The Willis report said that catastrophe bond spreads declined 15 to 20 per cent last year compared to 2013.

It added that last year had also been a record-breaker for non-life catastrophe bond issues, with around $8 billion committed to the market.

The report said: “Collateralised reinsurance also continues to grow, although the rate of growth may not be as pronounced in 2015, there are no signs of growth abating.”