AM Best has cut its outlook for the global reinsurance sector to negative, with market headwinds presenting “significant” long-term challenges for the industry.

“It remains difficult to stray from the simple fact that compressed investment yields, lower underwriting margins and broader terms and conditions place a strain on profitability, and that reinsurers are being paid less and less to bear risk,” the ratings agency says in a report.

It says relatively benign catastrophe years, continued net favourable loss reserve development and stable financial markets are needed to produce even low double-digit returns.

“Such return measures would have been considered average or perhaps mediocre just a few short years ago.”

Companies with diverse business portfolios, advanced distribution capabilities and geographic breadth are considered better placed to withstand the pressures.

In April AM Best announced it would re-evaluate its stable outlook for global reinsurers after the mid-year renewal season.

The company says it does not anticipate a significant number of negative outlooks or downgrades over the very near term.

In June Moody’s cut its outlook for global reinsurance to negative from stable, blaming growing competition from new entrants and market overcapacity.

Fitch also has a negative outlook while Standard & Poor’s has warned that pressures on reinsurers are increasing.