Cash-rich businesses like internet giants Google could use their financial clout to muscle in to the reinsurance market, an expert said yesterday.

And Dennis Sugrue, director of ratings agency Standard & Poors (S&P), warned the industry that it would need to continue to innovate — or face a challenge from new competitors.

He said it was “not completely outside the realms of possibility” that major players could move to cut out the middleman using their own cash and massive amounts of data, hire underwriters and use its own data to write insurance policies.

Mr Sugrue added that major corporations had already looked at to write their own sidecars direct with the capital markets.

He said: “If the insurance industry is not taking the lead, is following other industries and being reactive to some of these global trends, you could see reinsurers and the insurance industry as a whole suffer from missed opportunities.”

The caution came as the industry is feeling the pressure from a soft market and slumps in pricing in nearly all lines of business — which is cutting into excess capital.

Mr Sugrue, speaking in London, said that a five percent reduction in catastrophe reinsurance and a resulting ten percent hike in catastrophe exposure as reinsurers write more policies to maintain their top lines would mean a loss of $8.3 billion in excess capital from the total of nearly $60 billion of excess reported to S&P by 23 rated insurers at the start of the year.

He added: “It’s just a demonstration of how much impact pricing could have for companies’ excess capital positions. Movement like this could mean movement in capital adequacy for some players who are holding a bit tighter on capital.”

The S&P combined ratio forecast for its rated insurers is between 95 and 100 percent for this year and between 98 and 104 percent for 2015 — which reflects an expected deterioration in the sector’s operating performance and a significant decrease in premium rate.

The return on equity is expected to be between seven and nine percent for both years as S&P reckon that interest rate rises will impact on results until 2015.

Mr Sugrue said: “Those companies that have the global size and the ability to offer large lines of capacity and meet the needs of clients around the world should be able to withstand some of these competitive pressures.”

He added: “For smaller, more concentrated reinsurers it’s not the end of the road, but they will need to carve out competitive positions and protect their capital and bottom lines — and that is increasingly difficult in the current marketplace.”

And he warned that even firms best fitted to get through the current cycle faced challenges and that the industry “must lead from the front or get left behind” if it is to capitalise on opportunities to grow alongside the global economy.

Mr Sugrue said that areas like the effective use of “big data”, seeing climate change as an opportunity and growing in emerging economies all offered potential for the industry.

And he dismissed industry proposals to take advantage of windows of opportunity in the traditional reinsurance market, like cheaper casualty reinsurance, as a short-term solution.

Mr Sugrue said: “We think that industry will eventually undergo an reconfiguration where we will see fewer larger reinsurers, who could potentially be competing with other industries to provide risk protection products.”