Reinsurers are increasingly entering capital market partnerships as financial investors’ abundant capacity puts pressures on prices and drives “thinner” underwriting profits, according to a report by AM Best.

They have “sought to partner with this capacity rather than fight it”, the ratings agency says.

Hedge funds, pension funds, endowments and trusts have been lured to the reinsurance market by favourable returns and risk diversification, although AM Best says there are concerns about the staying power of the financial capital.

Pension funds have been in reinsurance for some time and are likely to be long-term investors, while hedge funds “dart in and out” as opportunities arise.

Traditional reinsurance companies could emerge from soft market conditions in strong positions by sharing future losses with third-party capital, most of which then quickly exits, AM Best says.

“That will be the trial by fire. Until the staying power of recent third-party capital is tested by the wrath of a major loss, reinsurers will jockey for position to make sure they have a horse in that race.”

Renewal prices slumped in Florida and other southern US states in June and July, with US property catastrophe pricing down as much as 20%, according to the report.

Meanwhile, a Fitch Ratings report on the outlook for global reinsurance forecasts a “broader softening of prices at the January 1 2014 renewals and beyond, assuming no significant loss events, because of surplus underwriting capacity”.

“While Fitch expects prices to remain adequate across major classes, underwriting discipline will be tested,” it said. “We also expect continued competition between traditional and alternative reinsurance.”

Fitch has a stable outlook for the global reinsurance sector, supported by capital strength and continued profitability. A persistent low-yielding investment environment and falling prices could lead to a deterioration of the sector’s credit profile, it says.

AM Best says the top five global reinsurance groups by gross written premium last year were Munich Re, Swiss Re, Hannover Re, Lloyd’s and Berkshire Hathaway.