Reinsurance firms have cut exposure in areas like property catastrophe that fail to produce acceptable returns, a new survey has revealed.

And the AM Best briefing on global reinsurance said that trend was likely to continue this year as firms struggle with intensive competition from outside capital and lower underwriting margins.

The ratings agency report said: “The orderly approach to market to risk selection appears to be working for global companies and most are expected to remain cautious on the business they write as capacity remains high and the market becomes increasingly competitive.”

The report added: “Companies with both insurance and reinsurance books of business continue to be more weighted toward primary business, given that pricing remains relatively more attractive and access to the business easier.”

But the report said some primary lines of business had already shown a fall in pricing or a slowdown in price increases over the last few quarters.

It added: “Conversely, companies that write predominantly reinsurance and focus on underwriting are in danger of reducing their books of businesses to levels that may render them less relevant in the market, which could lead to more mergers and acquisition activity.”

And the study said that changing conditions may force firms to think the previously unthinkable.

It explained: “The cultural barriers that have been cited in the past as obstacles to consolidation may become less of a factor if companies shrink to where they can no longer compete in this increasingly global market.”

In the last year alone, Validus Re has bought Western World in the US, while RenaissanceRe agreed to acquire Platinum Underwriters, while speculation continues on whether Montpelier Re’s board would put the company up for sale.

And this month, XL signed an agreement to take over Bermuda-based Catlin, which would result in a top-ten global reinsurer.

The AM Best report said: “All of these are examples of the need for greater global scale and diversified product lines and distribution, replacing the days of speciality-focused reinsurance companies.

“Companies with well-diversified businesses and a global reach likely will only get larger as smaller players put themselves up for sale or seek strategic partnerships to survive.”