The winds of change are blowing through the reinsurance industry as it gathers for its annual Monte Carlo rendezvous.

There will be the usual cocktail parties and sailing regattas, of course, but there can’t have been many Rendezvous de Septembre with such pressing issues on the table since the first gathering in 1957.

Commentators have been queuing up to list the challenges facing an industry that will likely never look the same again, as competitive pressures pile up and capacity outstrips demand.

While the strength of reinsurer balance sheets has enabled most groups to remain safely anchored for now, this cannot last forever.

Ratings agency Standard & Poor’s (S&P) issues a stark warning in its latest reinsurance report – adapt and innovate or be left behind.

It predicts pricing across the sector will fall by 5-10% in the coming year as capital continues to flood into the market, attracted by strong earnings. Insurers are also buying less protection as better risk management reduces their need to cede risk.

Reinsurers must reinvent their business models to this changing climate or risk being marginalised, S&P says.

“We do not consider it inconceivable that corporations could arrange their own alternative risk-transfer mechanisms, sidestepping the insurance industry, or that internet companies that have access to almost unlimited data could begin to use it to underwrite insurance risks.”

It says reinsurers must look to new opportunities to demonstrate value.

“For example, they can facilitate the use of Big Data to help clients identify fraud, protect themselves against cyber attacks or manage their risk exposures,” the report says.

“They can also help governments and corporations improve their resilience to natural disasters and protect themselves against extreme events.”

Moody’s Investors Service is another ratings agency to have looked askance at reinsurance’s fierce competition, overcapacity and low returns, reinforcing its negative outlook on the sector.

It had forecast a price drop of 15-20%, but now says such a severe outcome is unlikely.

Non-traditional competitors such as insurance-linked securities (ILS) funds have less scope to drive down prices, given they are set to report one of their least profitable years.

“Price declines will continue, albeit at a slower rate,” Moody’s VP Kevin Lee says.

AM Best’s Global Reinsurance Segment Review warns benign catastrophe years can mask a weak earnings environment.

“One can look at the reinsurance sector’s 2013 year-end results and 2014 year to date, which positively skew earnings trends and prospective earnings potential and ignore that companies are being paid less and less to bear risk,” it says.

“However… it will continue to take optimal conditions, including benign or near-benign catastrophe years, a continued flow of net favourable loss reserve development and stable financial markets to produce even low double-digit returns.”

The ratings agency does not anticipate a significant number of negative outlooks or downgrades in the short term but “the market headwinds… present significant challenges to the reinsurance sector”.

The latest Aon Benfield Aggregate (ABA) report, which covers the results of 31 major reinsurers, estimates global reinsurer capital totalled $US570 billion ($623 billion) at June 30, up 6%.

It also finds record levels of catastrophe bonds were issued in the first half of this year, up 50%.

A “structural shift” in the way capital is raised and used to mitigate insurance risk is under way, the report says.

“The pool of potential investors is broadening and new money is flowing towards structures offering access to quality business at relatively low cost. These changes are forcing the ABA companies to re-evaluate their business models.”

Aon Benfield’s latest Reinsurance Market Outlook report reveals the cost of reinsurance capital for catastrophe risk has, in many cases, decreased to one half the cost of equity capital for insurers.

And while its annual Insurance Risk Study reveals the property and casualty industry achieved a global underwriting profit last year, it says Big Data is seen by many as the way to continue to grow profitability in a record capital environment.

At reinsurance broker Guy Carpenter’s Rendezvous opening briefing, President and CEO Alex Moczarski said market conditions continue to be driven by limited catastrophe losses and the influx of alternative capital.

Guy Carpenter estimates non-traditional capital now makes up 16% of the $US300 billion ($332 billion) global property catastrophe limit. This is up from 14% last year and double the 8% of 2008.

Mr Moczarski fears the “deflationary effect of excess capital” can lead to “negative introspection or just waiting for the ‘big one’ to strike”.

Such a passive approach won’t do, he says.

“We must take the initiative. For a broker, this means constant innovation, anticipation of clients’ needs and delivering the best solutions.”

Despite the challenges, nobody is suggesting major reinsurers cannot weather the current storm.

But the storm is a big one and its consequences uncertain. So like ships navigating in strange waters, the reinsurance giants have no option but to change course, rather than wait for it all to blow away.