More mergers and acquisitions are expected in the insurance and reinsurance industry, as companies look for new growth sources and consolidate positions, according to AM Best.

The ratings agency says the past few months’ wave of major deals underscores the pressure facing insurers and reinsurers.

“In the reinsurance sector, a significant factor has been that rates and terms and conditions remain under pressure as a result of the recent period of benign loss activity and the influx of alternative capital,” Group VP John Andre said.

“As competition is intensifying, operating margins are being squeezed.”

Prevailing low interest rates have hurt investment returns, while reducing borrowing costs to fund acquisitions.

Zurich-based Ace’s $US28.3 billion ($38.34 billion) acquisition of US rival Chubb is the latest deal to shake up the sector.

Others include XL’s merger with Catlin worth $US4.1 billion ($5.6 billion), Tokio Marine’s $US7.5 billion ($10.2 billion) purchase of HCC Insurance Holdings and Canada-based Fairfax Capital’s $US1.9 billion ($2.6 billion) acquisition of UK insurer Brit.

Mergers and acquisitions are favoured by insurers and reinsurers that find it increasingly difficult to generate profitable organic growth.

“Industry consolidation can be a positive step, with improvements in risk-adjusted capitalisation and competitive position as a result of a transaction potentially leading to positive ratings development,” AM Best says.

“Industry consolidation can also result in reduced expenses and cost efficiencies.”

Smaller players stand to lose the most as more deals occur.

“Smaller reinsurers will continue to struggle as dominant companies can have more influence on terms and conditions, or can steer business towards an affiliate,” AM Best says. “The policyholder, theoretically, will have less choice from an insurance provider, but at the same time can benefit from greater security through the purchase of protection from a stronger, financially sound entity with highly refined underwriting ability and product offerings.”