The flow of third-party capital into the reinsurance market is intensifying competition while demand for cover is declining, AM Best says in a newly released special report on the industry.“Until the staying power of recent third-party capital is tested by the wrath of a major loss, reinsurers will jockey for position to make sure they have a horse in that race,” AM Best said.“Traditional reinsurance companies may be able to emerge from this soft market in a strong position by sharing the brunt of any future losses with third-party capital, a vast majority of which then quickly exits.“That will be the trial by fire.”Shelby Weldon, director, Licensing and Authorisations at the Bermuda Monetary Authority said Thursday that new registrations in Bermuda in July were predominantly Special Purpose Insurers (SPIs).Seven SPIs with projected premiums in the first year of operations of over $151 million were registered, he said.Those seven new SPI’s are projected between them to underwrite over $1.7 billion over the next five years, across a range of re/insurance business.AM Best stated in its report that despite a subpar operating climate, global reinsurers have managed to squeeze out relatively reasonable returns on capital and compensate investors while sustaining organic growth in capacity.“Quite an accomplishment, especially considering all the various obstacles they have and continue to navigate,” AM Best said.Over the past two-and-a-half years, catastrophes worldwide have inflicted approximately $190 billion in insured losses, according to Swiss Re’s Sigma.“For global reinsurers, these events were primarily a drag on earnings, as balance sheets remained robust,” AM Best said.“The challenge of managing loss accumulation from global catastrophes was evidentin 2011, and since 2008 reinsurers have faced numerous hurdles due to a weakened global economy: deteriorating investment returns; more volatile investments; suppressedgrowth opportunities; increased client retentions and competitive pricing.”A few hedge funds have chosen to enter the reinsurance market directly by forming new reinsurance companies, which certainly has drawn attention, AM Best noted.“However, with hedge-fund backed companies, not all of the capital is dedicated to providing reinsurance capacity. A substantial portion of that capital supports investment risk.“Other investors have found it easier to collaborate with traditional reinsurers or collateralized facilities that already have the operational infrastructure, established relationships and, most important, the intellectual capital to succeed at building a profitable underwriting portfolio.”Over the past year, numerous new sidecars have been formed by traditional reinsurers.Third party or managed capital is being spun as affording additional financial and operational flexibility.“This source of capital provides additional underwriting capacity to better serve clients and complements the traditional balance sheet and risk appetite,” the report said.“Managed capital therefore should allow the reinsurer greater flexibility with capital resources throughout the underwriting cycle and provides a low-risk source of income in the form of management fees and profit sharing.“This revenue offsets fixed operating costs that otherwise would fall to the bottom line. “AM Best added: “The bad news is that more capacity only makes reinsurance pricing more competitive, especially when demand for cover is declining.“The stickiness of this capacity also remains questionable.“The traditional market long has prided itself on enduring, deep client relationships.“Should this additional source of capacity decide to exit quickly, the underwriter might have some explaining to do!“Reinsurers have seriously contemplated this reputational risk and should continue to do so.“As is the case with SAC Re, a company’s affiliation can greatly influence its destiny.”