Credit rating agency Moody’s Investors Service lowered its outlook on the global reinsurance sector Wednesday to “negative” from “stable”, citing the emergence of a series factors that are pressuring reinsurers simultaneously.

The factors cited by Moody’s in its report announcing the change in outlook include overcapacity, increased competition from new forms of non-traditional capital, more substitute products, low interest rates, and the greater bargaining power of buyers.

The report notes that the current soft market shows many of the traits of the late 1990s, but it says that the current market situation is not exactly the same.”One key difference is that reinsurance buyers today have greater incentives to improve capital efficiency, limiting their need for reinsurance,” said Kevin Lee, senior credit officer and author of Moody’s report. “Tighter regulatory oversight and the need for better internal governance have pushed insurers to get more mileage out of their capital.”

Moody’s also says that reinsurers are facing more competition, particularly in the catastrophe reinsurance product line. “Low interest rates and the pursuit of uncorrelated investments have led investors to put tens of billions of dollars into reinsurance risks, effectively introducing a low-cost provider that is trying to assert cost leadership in more and more areas of the reinsurance market,” it says.

This “non-traditional” capital has already displaced a portion of traditional capacity from the catastrophe reinsurance segment, it says; adding that catastrophe reinsurance is critical as it drives the industry’s results in big-loss years and no-loss years, dictates reinsurers’ capital needs and capital structures, and subsidizes less profitable product lines.

To remain competitive and still earn their cost of capital, reinsurers are deploying various defensive strategies which are credit neutral at best, Moody’s says. “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,” notes Lee.