Major reinsurers may be facing credit rating downgrades after an industry watchdog warned the business had “nowhere to hide” from mounting competition.

The grim news — the worst outlook for eight years — came from ratings agency Standard & Poor’s (S&P), as the new year renewals from primary insurers saw the biggest drop in premiums for more than a decade.

Dennis Sugrue, insurance manager at S&P, said the industry had reached a “tipping point” over the new year — and that mergers “may be one of the few viable survival options” for smaller companies trying to compete on a global scale with larger rivals.

And Mr Sugrue added: “For the fist time since 2006, we are expecting to see more negative rating actions in the sector than positive ones.”

Share prices for some of the largest reinsurers have fallen since the new year amid concern about how they are coping with increased pressure on pricing.

And a wave of funding into reinsurance — including insurance-linked securities — has helped drive premiums lower.

The use of sidecars — where reinsurers set up specialist funds in which non-insurers can invest — and catastrophe bonds, which are issued by primary insurers, are also eating into the reinsurance market.

S&P said the use of alternatives — along with a lack of major natural disasters — had contributed to an oversupply of capital and said that the profitability of reinsurers would “likely be hit from many angles.”

The latest report from the ratings agency is the most negative view of the industry in eight years — when Hurricane Katrina, which devastated New Orleans, prompted a downgrade.

S&P said that “nearly half” of the 22 reinsurers whose creditworthiness it rates were “significantly exposed” to pressure from mounting competition in the sector.

Mr Sugrue added: “We think that companies without a defendable competitive position or those who are more aggressive in maintaining market share by competing on price or relaxing their underwriting discipline, are most at risk.

“If we observe that a reinsurer’s product mix or risk profile indicates unfavourable competitive undercurrents, relative to other global reinsurers, we could revise our assessment of its business risk profile to reflect the relatively higher risk.”

The report added that companies that provided a high percentage of natural disaster coverage — one of the most competitive areas — faced particular problems.

And S&P said that a combination of all these factors would lead to “consolidation or negative rating actions for a select few.”

A downgrade in rating for a reinsurer is a major problem for both insurance and reinsurance companies as buyers of policies use them to determine how much cover to buy from individual companies and the terms.

But S&P said primary insurance firms should benefit from lower reinsurance costs — although the report pointed out that many large groups operate in both areas.

The S & P report came as ratings agency Fitch said that the investment strategies of some companies in the wider insurance sector left them open to risk.

The Fitch report said the industry — in a bid to offset weak investment returns from fixed income-dominated portfolios — was increasingly tempted to turn to risker assets like equities, real estate and alternative assets.

The Fitch report added: “That could ultimately have negative rating implications.”