Reinsurance rates in Australia are set to fall further as a result of mergers in the sector, says Guy Carpenter.

CEO Pacific Tony Gallagher told insuranceNEWS.com.au bigger reinsurers may mean bigger limits locally, and mergers are likely to keep the pressure on rates.

“They won’t want to drop their top line following a merger. There will be a run-on effect to the local market and, barring something pretty major, rate reductions are set to continue.”

He says savings on reinsurance are generally being used to purchase more cover.

“When you make a saving on reinsurance, what do you do with it? If you buy more limit that gives you a safety factor for major losses. It’s a good utilisation of the saving.”

Guy Carpenter’s mid-year report found rate declines persisted through mid-year renewals in most lines of business.

Alternative capital, excess capacity and a lack of costly catastrophes are the main contributing factors, with $US18 billion ($24.35 billion) entering the market through insurance-linked securities in the past 18 months.

However, average decreases have mitigated in US catastrophe reinsurance, where overcapacity was not as prevalent, and buyers are increasingly purchasing more reinsurance to take advantage of lower costs.

There has also been an expansion in customised coverage, with clients seeking access to innovative new products and improved terms and conditions.

“Capacity affords us the opportunity to develop new solutions for new risks and consequently drive growth, enabling the industry to provide cover for risks that are currently uninsured,” the report says.

The soft market appears to have driven the long-predicted wave of mergers and acquisitions, but the report says other factors have been at play.

A number of transactions were driven by market conditions, notably Renaissance Re and Platinum, XL and Catlin, Endurance and Montpelier, Axis’ approach to Partner Re, and the Ace and Chubb tie-up.

However, this does not explain deals such as Fairfax and Brit, Fosun and Ironshore/Meadowbrook, Tokio Marine and HCC, and Exor’s counterbid for Partner Re.

“In each of these cases, the transactions are not driven by consolidation synergies but rather by recognition of the inherent attractiveness of a target’s business model and ability to generate an acceptable investor return on capital, despite market conditions,” the report says.

The report highlights cyber risk as “one of the most pressing and public topics the industry is grappling with”.

The global cyber market is worth $US2 billion ($2.71 billion) but is expected to grow to $US5 billion ($6.76 billion) over the next five years.

Mr Gallagher says reinsurance solutions are starting to come to the fore.

“They are probably not 100% solutions but reinsurers are starting to provide something. The limits are finite and the exposure is still unknown.”