Citing a confluence of market stressors, Moody’s Investor Service joined other rating agencies in pronouncing a negative outlook for the global reinsurance industry.

Financial and reinsurance market conditions, together with alternative market capital competition and a stockpile of capacity convinced Moody’s to downgrade from “stable” to “negative” its outlook on the reinsurance sector, joining Standard & Poor’s and Fitch Ratings’ earlier expressions of pessimism.

Moody’s said the outlook change was prompted by a number of factors that are pressuring reinsurers simultaneously: an oversupply of capacity, new entrants in the form of non-traditional capital, more substitute products, low interest rates, and greater bargaining power of buyers.

The industry outlook is titled, “Global Reinsurance Outlook Turns Negative” and represents the rating agency’s view of the sector over the next 12 to 18 months.

A Moody’s statement on the report said the current soft market shows many of the traits of the late 1990s — an overabundance of capital, double-digit annual price declines, a substantial rise in buyers’ bargaining power, and predictions of industry consolidation. But the forces fuelling the current market situation are not exactly the same.

“One key difference is that reinsurance buyers today have greater incentives to improve capital efficiency, limiting their need for reinsurance,” said Kevin Lee, author of the report. “Tighter regulatory oversight and the need for better internal governance have pushed insurers to get more mileage out of their capital.”

At the same time, reinsurers face more competition, particularly in the catastrophe reinsurance product line.

Low interest rates and the pursuit of uncorrelated investments have led investors to put tens of billions of dollars into reinsurance risks, effectively introducing a low-cost provider that is trying to assert cost leadership in more and more areas of the reinsurance market.

This “non-traditional” capital has already displaced a portion of traditional capacity from the catastrophe reinsurance segment, which holds high strategic stakes for many reinsurers. Catastrophe reinsurance drives industry results in big-loss years and no-loss years, dictates reinsurers’ capital needs and capital structures, and subsidises less profitable product lines. To remain competitive and still earn their cost of capital, reinsurers are deploying various defensive strategies which are credit neutral at best.

“We believe reinsurers that are best positioned to cope with the sector’s challenges are those that have already demonstrated their strategic relevance to clients and possess relevant size, superior claims service, whole-account capabilities, and a solid insurance platform,” notes Lee.