Global reinsurers’ return on equity (ROE) has been in decline since 2012 but remains profitable at about 10%, according to a Morgan Stanley report.

The big four major reinsurers – Munich Re, Swiss Re, Scor Re and Hannover Re – are all delivering ROE above 10%.

However, Morgan Stanley says the outlook for the global insurance cycle is “tough”.

“Soft reinsurance pricing is flowing through to weaker global pricing by primary insurers, particularly in broker-intermediated commercial lines. We prefer exposure to strong domestic franchises (IAG) and specialty business that is relatively more resilient (QBE).”

The investment bank is pessimistic on the industry’s outlook, predicting “things likely need to get worse before they get better”.

“We see two scenarios that could shock the global reinsurance market into lifting pricing,” the report says. “One would be an unmodelled black swan event, perhaps man-made. The other would be an unfortunate run of large natural catastrophes on an even greater scale than 2011.”

Global catastrophe losses totalled $US130 billion ($170 billion) in 2011.