An overabundance of capacity, competition from alternative capital, low-interest rates and a buyer’s market are prime factors that led Moody’s Investors Service today to change its outlook on the reinsurance sector to negative from stable. 

“We believe reinsurers that are 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,” says Kevin Lee, author of the Moody’s “Global Reinsurance Outlook Turns Negative” report, in a statement.

Moody’s says the growing alternative-capital presence in the sector is causing disruption as it is primarily a factor in the catastrophe reinsurance product line, which, Moody’s explains, traditionally “drives industry results in big-loss years and no-loss years, dictates reinsurers’ capital needs and capital structures, and subsidizes less profitable product lines.”

Moody’s also says the current soft market for reinsurance line shows many of the traits of the late 1990s, such as the abundance of capital, pricing declines and predictions of consolidation. But the drivers are different. “One key difference is that reinsurance buyers today have greater incentives to improve capital efficiency, limiting their need for reinsurance,” Lee says in the statement. “Tighter regulatory oversight and the need for better internal governance have pushed insurers to get more mileage out of their capital.”