Cost-cutting measures in the reinsurance industry are being applied more aggressively in response to decreasing prices, according to an international broker and risk adviser.

In its 1st View report on the state of the market at a crucial reinsurance contract renewal period, Willis Towers Watson said rates are continuing to fall as traditional reinsurers face strong competition from insurance-linked securities backed by alternative capital.

Many carriers in Bermuda’s flagship insurance and reinsurance industry have streamlined their operations in recent years, in response to the soft market and investment returns pressured by a prolonged period of low interest rates. And some have joined forces with competitors in a spree of consolidation.

John Cavanagh, Willis Re’s global chief executive officer, said the downward pricing trends shown at January 1 and April 1 renewals had continued at July 1, despite deterioration of reinsurers’ results in the first-quarter.

“Yet again, we’re in a position where the weakening in the global reinsurance industry’s performance has not reached an unacceptable level,” Mr Cavanagh said.

“Reinsurers across the board do not yet feel compelled to take a stronger stance over conceding further modest rate reductions and walking away from clients.

“Much now will depend on loss activity in the traditionally more active third and fourth quarters and on any instability in investment returns.”

Mr Cavanagh added that continued softening had been driven by reinsurers’ realisation that the June and July renewals represented the last realistic chance to meet their 2017 premium targets.

He added: “This was clearly seen in the Florida renewals where, in the face of flat demand, a larger-than-anticipated influx of capacity, particularly from insurance-linked securities markets, led to not only a further drop in pricing from the 2016 renewals but at a greater pace, albeit slight, than the reductions seen on US property-catastrophe programmes earlier this year.”

As results continued to deteriorate, Mr Cavanagh said there were “worrying trends” in performance measures, with combined ratios for many classes now looking unattractive.

“In the face of stubbornly soft pricing, cost control measures are being applied widely and more aggressively across the entire global reinsurance chain, as managers of reinsurance companies seek to mitigate the effect through cost reduction,” Mr Cavanagh noted.

“Market initiatives to contain and reduce costs such as the London market Placing Platform Limited initiative are seeing increased impetus and support as the critical importance of the promise of greater efficiency is recognised.”

High stock valuations and pressure on profits had caused some reinsurers to slow the pace of share repurchases, he added, causing some to expect an increase in mergers and acquisitions activity.

“While it is undoubtedly correct that scale gives organisations both the ability to be relevant to clients and the scope to more actively reduce cost, the challenge of execution remains,” Mr Cavanagh added.

“With only a limited number of opportunities and significant operating and performance issues emerging in some of the oft-touted M&A candidates, undertaking new M&A is arguably more challenging than it has been for many years.”

The full Willis Towers Watson report is available at goo.gl/ELtygP