Moody’s has changed its outlook for the global reinsurance sector to negative from stable, amid growing competition from new entrants and market overcapacity.

The supply of non-traditional reinsurance capital has doubled to $US50 billion ($53.2 billion) since 2008, according to the ratings agency.

“Pension funds, endowments, institutional investors and high-net-worth individuals continue to pour tens of billions of dollars into catastrophe risks and select reinsurance risks, principally through catastrophe bonds, insurance-linked securities, hedge funds and, to a lesser extent, joint ventures with reinsurers [sidecars].”

In next year to 18 months Moody’s expects reinsurers to face pressure on many fronts, with more non-traditional capital, more substitute products, low interest rates and greater bargaining power among buyers.

It says buyers also have greater incentives to improve capital efficiency, limiting their need for reinsurance.

Over the past decade they have consolidated reinsurance purchases to maximise the advantages of diversification, retain more risk and improve efficiencies in cost, administration and capital.

Allianz has consolidated reinsurance purchases across the group, cutting 28% from its annual spend on property and casualty (P&C) reinsurance between 2005 and last year.

Hannover and multinational insurers Axa and Zurich have also consolidated and centralised property and casualty and life reinsurance purchases.

AIG has reduced its annual reinsurance spend by $US1.1 billion ($1.17 billion) since 2009.

The catastrophe reinsurance market faces its own challenges, with low interest rates and investors putting tens of billions of dollars into uncorrelated reinsurance risks.

This capital has displaced a portion of traditional capacity and driven catastrophe reinsurance prices down to pre-Hurricane Katrina levels, without a clear floor.

“We believe reinsurers 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,” Moody’s says.