Reinsurance rates are struggling to stabilise due to profitable results achieved in 2016 and a continuing capital oversupply.

That is the assessment of Willis Re, the reinsurance advisory business of Willis Tower Watson.

And it has noted that while mergers and acquisitions slowed last year, two large deals have reflected a view that the incoming new US administration will provide a more favourable corporate tax environment that may lessen the attractiveness of the offshore reinsurance model.

In its 1st View report on market conditions at the January 1 renewals, John Cavanagh, global CEO of Willis Re, noted: “The pace of consolidation driven by M&A has slowed as compared to 2015, but there have been a number of notable transactions, including Sompo Japan and Endurance.

“In the last few weeks, two large deals — the acquisition of Allied World by Fairfax Group and Liberty Mutual acquiring Ironshore — were announced. These two transactions reflect the view that the new US government may provide a more favourable corporate tax environment, leading to a change in the balance, tilted against the offshore model.”

President-elect Donald Trump has spoken of lowering US corporate tax from 35 per cent to 15 per cent.

The Willis Re report noted that despite a 50 per cent increase in insured losses from natural catastrophes during last year, the global reinsurance industry achieved profitable results for the third quarter.

“Reinsurers, eager for more widespread rating stabilisation, have had their hopes dashed again, thanks to profitable results allied with continued capital oversupply from both traditional reinsurers and capital markets,” said Mr Cavanagh.

Regarding renewals, he added: “While there are signs that reinsurers are not prepared to be as flexible as in earlier years, many buyers have yet again managed to achieve improved terms. Sizeable reductions have been obtained on international business.

“In the US, there are signs of more stability, driven by the capital intensive nature of some US classes and the very significant improvements in terms in recent years.”

Capital continues to flow into the sector, particularly through catastrophe bonds and collateralised placements, reducing profit margins. And that alternative capital trend is reaching into new areas, such as motor liability.

Major reinsurers are taking “stronger client-centric approaches,” said Mr Cavanagh. “This is leading to superficially inconsistent underwriting at a market level, which is misleading. Most major reinsurers in the current pricing environment are applying increasingly sophisticated and active portfolio management strategies, including the use of third-party capital partners, which are generating less generalised and more client-specific outcomes.”

While reinsurers have remained profitable, conditions have become tougher for many primary companies.

“Rising combined ratios in many markets, including Lloyd’s, driven by competition both from existing peers, as well as from new-style competitors utilising innovative low-cost distribution and cost models, is a growing concern,” said Mr Cavanagh.

Innovation and disruption are also having an impact.

“InsurTech is rapidly emerging from theory into practical application, leaving many primary companies to ponder how to respond, while some of their peers are forging ahead, embracing the opportunities InsurTech offers.

“Among the most committed supporters of disruptive InsurTech solutions are capital markets and some reinsurers who are seeking access to original risk.”

In conclusion, Mr Cavanagh said: “Despite the pressures, the global reinsurance market is facing, the ability to produce yet another profitable year, somewhat against the underlying pricing models, has meant that the pain threshold to force a market pricing stabilisation has not yet been reached.

“With the January 1 renewal season setting the tone for 2017, reinsurers can only look forward to another demanding year where luck will play an even larger role in determining their final results.

“At the same time, buyers can anticipate that the period of time where reinsurers (reluctantly) accommodate their requests will be extended.”