Kurt Karl, chief economist of reinsurance giant Swiss Re, warned the billions of dollars poured into the reinsurance market from pension funds are here to stay, forcing more mergers and acquisitions as players team up to compete and survive.

Mr Karl, who visited Australia last week, said big insurers and reinsurers were combing the market for "strategic, special niches" while smaller players were joining forces for more market share and diversification across their businesses.

This comes as yield-hungry pension and hedge funds continue to pour billions into the reinsurance market – a trend that is forcing down prices as competition for business heats up. According to data from broker Aon at the start of this year, reinsurer capital grew to $US575 billion ($822 billion) including $US62 billion of alternative capacity, both of which were at record levels.

"The more diversified and the larger you are in this market, the more well-positioned you'll be," he said about M&A activity.
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"We don't think this capacity [from pension and hedge funds] will go away. We don't think it will grow as rapidly as it has recently as it's not as profitable any more, and we do think interest rates will rise … but the capacity is here to stay."

M&A has been a major theme across the industry in recent years, driven partly by the need for more financial clout as competition heats up and profit pressures persist.
In July, global property and casualty insurer ACE Group struck a $US28.3 billion deal to snap up The Chubb Corporation, while in Australia Insurance Australia Group had bought Wesfarmers' insurance underwriting unit in a $1.85 billion deal.

Earlier in 2015 XL Group bought Catlin Group in a $4.2 billion deal, as Dublin-based XL expands its commercial insurance business.
Challenges

IAG, which has been buying stakes in the Asian region, is selling down its stake in Chinese insurer Bohai but is eyeing a larger investment that will give the Australian insurer a national presence in the world's second-largest economy.

"All the bigger players are thinking about geographical diversification," Mr Karl said.

His comments come at a difficult time for reinsurers and insurance companies operating in the commercial cover space.

An overabundance of capacity has seen prices of reinsurance plunge 10 per cent on average at the start of this year, and chronic competition has seen insurers such as IAG, Suncorp Group and QBE Insurance Group cut prices to lure more commercial clients.

However, Mr Karl is optimistic that the dramatic plunge in reinsurance and insurance rates will stabilise this year.

Despite cheaper rates, Swiss Re research found that globally about $US1.3 trillion in assets remains uninsured for natural catastrophe property protection. In the past 10 years, the total damage to global property following natural disasters hit $US1.8 trillion, out of which only 30 per cent of losses were insured.

"The greatest extent of underinsurance is in the world's largest three economies," Mr Karl said.

"Earthquake risk makes up the majority of the gap in the US and Japan. There are areas of high property value concentrations in both, a large amount of which is uninsured against earthquake risk, despite the relatively high frequency of quakes."

In China, the main threats are floods in major industrial zones with high population and property values, he said.