* Falling prices pressure reinsurance industry
* Observers see 'tiering' benefiting global reinsurers
* Small reinsurers face strategy revamp or consolidation
By Jonathan Gould
FRANKFURT, Feb 25 (Reuters) - A slump in reinsurance prices is playing to the strengths of the biggest global reinsurers, while piling pressure on smaller competitors to diversify or consolidate.
Reinsurers, which help insurers shoulder risk in exchange for part of the profit, this month unveiled the results of talks with insurance company customers to renew contracts for the start of 2014, amid what analysts are calling the biggest market-wide price decline since the late 1990s.
The results showed that reinsurance suppliers were separating into tiers, with larger and diversified companies such as Munich Re, Hannover Re and Swiss Re faring much better than smaller and narrowly-focused firms, which are likely to struggle to meet return on equity targets, according to industry executives and brokers.
"It's a tough market for all but the larger two groups, the top two tiers of reinsurers, are probably doing disproportionately better," Swiss Re Chief Financial Officer George Quinn told Reuters.
The headwinds facing the industry are coming from different directions.
A dearth of natural catastrophes like hurricanes or earthquakes over the last two years has left many reinsurers sitting on a thick cushion of profit that has prompted their customers to press for cheaper premiums.
That price pressure has been compounded by competition from pension funds, which have poured into investment vehicles that offer reinsurance in direct competition with traditional reinsurance companies.
Global insurance companies are also getting better at managing risk.
Whereas different regions and divisions within one insurance company used to make their own reinsurance decisions, sophisticated new modelling techniques allow central managers to devise group-wide reinsurance strategies.
That is helping insurers to improve returns and better manage their capital, solvency and counterparty risks, and many are buying less reinsurance as a result.
"Clients are concentrating their buying behaviour and are more focused on a smaller list of reinsurers," Quinn said.
Reinsurers that can offer pricing, capacity and underwriting in multiple business lines that match the global approach of their clients will benefit the most, said Victor Peignet, a senior executive at French reinsurer Scor.
"A group of 5 to 15 reinsurers is emerging and is going to form the panel of co-partners for an increasing number of large and mid-sized insurers," he told a conference call this month.
He predicted the industry shake-out would intensify in the next rounds of contract talks between reinsurers and their insurance clients.
IS BIG BETTER?
Brokers say many reinsurance segments will see prices plunge by 25 percent in 2014.
But bigger players do not appear to have suffered too badly so far. Scor, for example, has reported a fall in average prices of just 0.2 percent, while industry leader Munich Re said it had seen a 1.5 percent decline.
"There is a growing sense that some carriers are beginning to fare better than others in this market," said Mike Van Slooten, head of market analysis at reinsurance broker Aon Benfield.
The changes can be seen in Aon Benfield's regular analysis of the top 31 reinsurance players, which represent more than 60 percent of the whole market, Van Slooten said.
"Even among the smaller players in that group, we see growing evidence of disparity in performance," he said.
Among the smaller players, for example, U.S.-listed Argo Group International Holdings has a return on equity of 5.9 percent over the last twelve months, compared with 12.7 percent for Swiss Re, according to Thomson Reuters data.
Smaller reinsurers - those with total capital of $3 billion or so - may need to reinvent themselves to stay in the game, by diversifying into insurance, forming consortia or seeking to act as managers of outside capital, industry observers say.
"Some smaller reinsurers will likely look to consolidate in order to survive," said Paddy Jago, President of broker Willis Re.
Consolidation does not have to take the form of mergers, however, and could result from weaker players being forced out of business as clients switch to other providers.