Pressure on reinsurance pricing could see rates drop lower than previously anticipated, with double-digit reductions possible during the January renewals.

That warning was given by Nick Frankland, of Guy Carpenter & Company, at the Baden-Baden Reinsurance Meeting in Germany this week.

It is a worse outlook than the one expressed at the industry’s Rendezvous gathering in Monte Carlo last month.

“In Monte Carlo, we were certainly suggesting that rate reductions will be in the region of between 5 to 7.5 per cent to maybe 10 per cent,” said Mr Frankland, chief executive officer of Guy Carpenter’s operations in Europe and the Middle East, in comments reported by Bloomberg. “They may be more than that. The market is struggling to understand how to quote in this environment.”

This year has, to date, been particularly quiet in terms for catastrophe losses, continuing a multiyear trend that has resulted in a build-up of more than $425 billion of surplus capital available for underwriting risk.

An increase in mergers and acquisitions (M&A) in the sector has had very little impact on the level of surplus capital.

Mr Frankland believes buyers will continue to enjoy a wide variety of choice as to where they place their business, due to market conditions, with terms and conditions continuing to widen and multiyear deals on offer.

“Capacity remains bountiful and buyers will continue to enjoy choice. This will weigh on the discussions that take place during the coming week and we expect some interesting manoeuvres as reinsurers seek to hold or grow their share of signings,” he said.

“We don’t anticipate an early end to the latest wave of M&A activity, nor the current pricing environment.”

Offering a contrasting view regarding pricing, David Flandro, head of analytics of JLT Re, believes an easing of downward pricing during the June and July renewals could be a turning point for the market.

Writing a special report for Insurance Day, he noted some increased demand for reinsurance, particularly in the US property catastrophe business where companies have picked up more business as state-backed insurers have transferred risk to the private market.

At the same time a number of state-backed carriers have increased cover, such as Florida Hurricane Catastrophe Fund which secured a $1 billion reinsurance placement.

A slowing of the rate of alternative capital entering the sector is another factor adding to a moderating of the rate of pricing declines, according to Mr Flandro.

He noted that risk-adjusted property catastrophe rates are now only 20 per cent above the cyclical low of the late 1990s, and concluded: “Time will tell whether 2015 will mark the turning point of the soft cycle that has prevailed since 2012. Either way, the situation will not continue indefinitely.”

Stephen Catlin, executive deputy chairman of XL Catlin, was one of the keynote speakers at the Baden-Baden Reinsurance Symposium, which discussed recent merger and acquisition activity and its impact on market dynamics.

Mr Catlin pointed out that it was not a case of “one-size-fits-all” and there were different criteria influencing consolidation, and not all deals were designed to create global super-players.

He advised that companies that felt consolidation was inevitable should look to take the initiative.

“If you believe consolidation is going to happen, why wouldn’t you get on the front foot, be proactive and choose your partner?” he said.

Another speaker was John Doucette, chief underwriting officer for Everest Re.

“As the reinsurance world restructures with new capital vehicles and higher velocity of capital, M&A is just one strategic mechanism for evolving in the new market reality. Despite the promised benefits, the costs and risks of M&A indicate that it is not the panacea,” he said.

“Global reinsurers are well positioned to build off their internal strengths with scale, diversification, and expense and capital efficiencies. Supplemented with innovative products and capital structures, relevance to clients and brokers can be maintained and enhanced for the winners in the new world order.”

The late 1990s saw more than a dozen mergers and acquisitions, pointed out fellow speaker Pérez de Lema, managing director of Mapfre Re.

Regarding the current situation, he said: “The winners will be those reinsurers that provide client-oriented, sustainable, consistent and professional services and capacities, combined with well designed business models.

“Some will be consolidators, but often they will be companies that have already built a strong franchise, skills, platforms and client relationships who will benefit from this trend, without having to enter into challenging and costly M&A processes.”

Summing up the discussion, moderator Chris Klein, head of Europe and Middle East strategy management at Guy Carpenter, emphasised that consolidation success would be depend on the quality of the execution.

“We have heard that growth is not simply about swallowing up each other,” he said.

“Amid all of the excitement of the announcements, the proof is in the execution and success ultimately depends on continuing to provide customers what they need and want at a value-for-money price within a stable relationship.”