Reinsurers may increasingly invest with other people’s capital rather than their own, according to industry experts.Multiple pressures on traditionally structured reinsurance companies, from investors, ratings agencies and regulators, is likely to lead the industry to adjust its capital structure.That was the thrust of the conversation yesterday on the “reinsurance value proposition” at the Bermuda (Re) insurance 2011 conference, sponsored by PwC and S&P.“The traditional model is probably broken” said Mark Byrne, chairman of Haverford (Bermuda) Ltd and co-founder of Flagstone Re. “What is really highly valued is underwriting talent and I expect to see more of the industry operate with discrete and flexible pools of capital.”Sidecars and similar vehicles are enabling reinsurers to boost capacity and underwrite more business, while the capital at risk belongs to outside investors.“I think the leaders in this are RenaissanceRe,” Mr Byrne said. “It’s my understanding that in a hard market, about half of their capital is other people’s money.”A functioning example of capital market convergence with the reinsurance industry is Bermuda-based Nephila Capital, whose co-founder and managing partner Frank Majors agreed with fellow panellist Mr Byrne. Nephila is an asset manager that invests in insurance-linked instruments.“Our innovation is to lower the cost of capital,” Mr Majors said.The costs that traditional companies faced, including the reporting requirements of listed companies, increasingly burdensome regulatory requirements and the fact that many were trading at discount to book value, could be reduced if the catastrophe risk was carried externally, he suggested.A new model, with reinsurance companies leveraging their relationships with clients and underwriting talent, and other entities providing the pools of capital and shouldering the risk of losses, could become more commonplace.The random nature of catastrophe losses meant the financial results of reinsurers covering those risks were also somewhat random, something investors did not always fully understand. Reinsurers who did better in articulating their strategy, would be punished less by the market when loss events came along, Mr Majors added.“The stock market has such a short-term view,” Mr Byrne said. “Investors often equate a bad result with a bad decision and a good result with a good decision and they can be wrong both times.”Bill Pollett, Montpelier Re’s chief corporate development and strategy officer and treasurer, said risks not correlated with the wider capital markets were attractive to investors, but they tended not to access that through buying shares of reinsurance companies.He added that Montpelier had expanded capacity through the capital markets in recent months. “This time last year we had no sidecar partners,” Mr Pollett said. “Now we have five or six and by the end of the year it could be seven.”This kind of arrangements allowed Montpelier to access “pockets of capital that want an interest in the industry but don’t want to have to buy the infrastructure”, Mr Pollett added.