Global reinsurance firms have been urged to radically re-think where and how they compete against each other in the market or face the risk of consolidation as the environment undergoes a major shakeup.
In its Reinsurance 2020 report, PwC said mid-sized reinsurers in particular should 'take control of their destiny' and warned that market capacity could fall by 40% as customers demanded more specialised and targeted solutions.
The report highlighted that the underlying problems were a combination of low interest rates, declining margins, limited traditional growth, low investment returns and the influx of insurance linked securities (ILS).
PwC suggested that reinsurers would be successful in the market if they differentiated themselves. The firm noted that competition now went beyond price and even underwriting expertise as clients look for scale, specialist expertise, deep territorial knowledge and advanced analytics.
It found that many customers were now prepared to pay a premium for more innovative solutions for their less well understood or newer types of risks. According to PwC, those without these capabilities were forming an increasingly squeezed middle that is vulnerable to consolidation or take-over.
It urged companies to source new markets where pricing is at a premium and to innovate outside of commoditised corners.
PwC global actuarial leader Bryan Joseph said: 'Many reinsures need a radical re-think of where and how to compete.
'With prices low and direct competition from ILS, clients can afford to gravitate to a select panel of higher rated, often larger, reinsurers. This is leaving some of the smaller and less well rated counterparts in the margins.
'Unless the undifferentiated generalists change track, it's only a matter of time before they're absorbed or squeezed out of the market all together.'
Arthur Wightman, Bermuda insurance leader at the firm, added: 'Reinsurers are experiencing unprecedented pressure on the viability of their business models.
'As more efficient capital continues to absorb a greater proportion of risk, reinsurers need to ensure they remain relevant through a clear focus on cots, risk insight and innovation.'
In a separate report, last week, ratings agency Moody's reinforced its negative outlook on the global reinsurance market. It said that fierce competition, over-capacity and low returns continued to put pressure on the industry.
Ratings agency Fitch this month also warned that mergers were likely in the reinsurance sector.