Reinsurers are venturing into “uncharted underwriting and strategic territories” as they grapple with a challenging environment marked by excess capacity and shrinking demand, Moody’s warns.

The ratings agency’s outlook for the sector remains negative.

Moody’s says reinsurers are increasingly focusing on unfamiliar areas such as emerging risks and markets.

Senior Analyst Brandan Holmes says this may mitigate the pressure on traditional lines and reinforce reinsurers’ relevance in alternative capital.

However, “the risks entailed in a large-scale move into new areas should not be underestimated”.

Moody’s Global Reinsurance Outlook for this year says the wave of mergers and acquisitions over the past 18 months is unlikely to end significant excess capacity.

Deals involving primary groups, such as the Ace-Chubb merger, are likely to reduce the need for reinsurance, because larger entities benefit from greater diversification and capital efficiencies.

“Reinsurers face a predicament as capacity remains abundant while demand from primary insurers is decreasing,” Mr Holmes said.

Demand has dropped due to the rationalisation of reinsurance purchases and low global economic growth.

Reinsurers’ earnings quality is deteriorating, according to the ratings agency.

Moody’s notes alternative capital has become more widely adopted, but the alternative market remains untested by a major catastrophe, “which could produce unexpected outcomes”.