Standard & Poor's has advised the global reinsurance sector to diversify its business risks or face negative ratings and increased volatility in earnings between 2014 and 2015.
Increased competition has caused premiums to decline, S&P said, with the knock-on effects threatening reinsurers' ability to maintain their financial strength.
Its report, Tough competition could put ratings on global reinsurers under pressure, recommended that 'diversification enables reinsurers to handle increased competition'
The agency said: 'Our overall view of the reinsurance industry's intermediate risk profile reflects earnings, pricing, and settlement characteristics across all lines of reinsurance business.
'We believe that reinsurers with a well-balanced, truly global product offering can benefit from diversification and are less acutely exposed to the pressures experienced in the property catastrophe lines of business today.
'However, if a reinsurer's business is weighted toward a line of business or region that is riskier than the rest of the market, such as property catastrophe, we may adjust our view of the company's business risk to reflect this concentration.'
Of those firms that are working towards mitigating the effect of increased competition on their business, S&P said, they were seeking more-profitable markets, or tweaking their investment strategies toward riskier assets to increase investment returns.
It noted that stronger, more diversified reinsurers were slightly reducing their exposure to property catastrophe business where prices have fallen sharply.
S&P said: 'Smaller firms are teaming up and forming consortia to gain scale. That said, ratings on reinsurers remain sensitive to change in our assessment of their business risk profile and risk position.
'In most cases, a downward revision to the business risk profile would trigger a negative rating action, because ratings on reinsurers are sensitive to changes in this subfactor. We assess the typical global reinsurer as having both a strong competitive position and a strong business risk profile.'
