That downward pressure may spill over into other lines of business when reinsurers and their insurance company clients renew a further round of contracts on January 1, brokers said.

James Vickers, chairman of broker Willis Re International, said price pressures will lead some reinsurers to shift their attention to speciality areas like marine or aerospace insurance, while others may opt to return excess cash to shareholders if prices are too low.

“The redeployment of capital that may not be used in U.S. catastrophe business is the most interesting conundrum,” Vickers said.

The world's biggest reinsurer, Munich Re, has already said it is considering buying back its own shares, while No. 2 player Swiss Re has said its “first priority” is growing its dividend.

Credit rating agency Standard & Poor's calculates that the reinsurance sector held $34 billion in excess capital last year.

ALTERNATIVE THREAT

As long as interest rates stay low, investors in alternative insurance products like catastrophe bonds look set to keep gnawing away at the profitability of traditional reinsurers.

Around $10 billion of new capital flowed into insurance-related investment structures over the last 18 months, with the total market now worth around $45 billion, reinsurance broker Guy Carpenter estimates.

New issues of catastrophe bonds may reach $7 billion this year, matching a record set in 2007 before the financial crisis, industry observers say.

Despite the challenges, credit rating agency Moody's gave an upbeat assessment of reinsurers at a briefing in London, arguing that most firms have embraced the new environment.

“While a continued inflow of alternative capital has the potential to alter the core business model of reinsurers, many firms in the sector have been preparing for this eventuality for years,” said James Eck, a senior credit officer at Moody's

But rival S&P, also in a London briefing ahead of the Monte Carlo gathering, said there was a risk to the long-term survival of many reinsurers.

“Reinsurers who aren't willing to adapt or try and stay ahead of the curve are going to be pushed to the sidelines or pushed out,” said Dennis Sugrue, a reinsurance specialist at S&P.

There could be a wave of consolidations in the industry, particularly among smaller operators, Sugrue said.

On Wednesday the chairman of insurance market Lloyds ofLondon warned the rush of money into alternative insurance products could destabilise the industry, potentially leading to a new financial crisis.

Lloyds boss John Nelson said the industry must avoid capital becoming detached from risk, a mistake which he said caused the banking industry's “systemic problems” from 2007.

But many reinsurers are clearly trying to ride the wave of alternative insurance investing, taking advantage of their own specialist understanding of risk to not only buy the bonds for their own portfolios but to advise others, too.

In Europe, reinsurers Swiss Re, Munich Re and Hannover Re are active issuers of cat bonds to protect their own reinsurance book and on behalf of insurance clients. U.S. players such as Allstate Corp and Chubb Corp are also regular issuers.

“Most reinsurers need and are beginning to develop some sort of third-party fund management capability,” said Willis Re's Vickers.

“Everybody is dabbling in the alternative capital area.”