Traditional reinsurers are facing challenges to their profit margins as capital flows into the market from a variety of sources, including catastrophe bonds, according to Willis Re, the reinsurance arm of Willis Group Holdings.And many reinsurers see the new flow of capital as a direct threat to their existing portfolios, said Willis Re chairman Peter Hearn.His remarks appear in an opening letter to the firms 1st View April Renewals Report, which assesses the current sentiment and trends in the global reinsurance market.Citizens Everglades Re 2013 natural catastrophe bond, which was listed on the Bermuda Stock Exchange at the end of March, is cited as an example of factors driving more aggressive pricing.The trend is highlighted in broker Aon Benfield’s market outlook report, also published this week, which said reinsurance buyers are getting better terms as a result of the influx of capital into the reinsurance market.It noted: “The insurance-linked securities (ILS) market is now offering the lowest cost of reinsurance for peak perils witnessed since [1992’s] Hurricane Andrew.”Aon Benfield’s expects the value of catastrophe bonds issued this year to rise as the June 1 start of the hurricane season approaches, estimating the issuance volumes may close as high as $4 billion. The total volume of catastrophe bonds either closed or marketed in the first quarter of this year was $1.79 billion, according to Aon Benfield.The Willis Re report notes that $35 billion of capital has entered the reinsurance market, and the inward flow of capital is increasing.“Faced with this wave of new capital, traditional reinsurers have begun to recognise the scale of the challenge to their current portfolios that the new capital represents,” says Mr Hearn in his opening letter.“While some reinsurers are considering how to respond, others are developing third party capital management propositions to offer their own skills and platforms as fund managers. The advent of new capital is likely to have a significant impact on any post-event response which may occur after a major loss.“To date, the traditional model of fresh capital coming into the market has been through the formation of new companies but it is being overtaken by a new model of fast capital flowing in through less permanent structures. For an industry where primary insurance companies value sustainability, this emerging model brings many challenges.”Mr Hearn notes that reinsurance premiums are coming down as the market is squeezed due to mergers and acquisitions and “higher retentions by larger insurers”, while at the same time growth in mature markets is sluggish and is not being offset by growth in developing economies.Commenting on market sentiment, he said: “The renewal of the Citizens Everglades Re 2013 natural catastrophe bond at a significantly reduced price and Allstate’s decision to reduce their traditional placement and increase their use of catastrophe bonds and alternative markets are driving more aggressive pricing.“Against this background, the outlook for many reinsurers is challenging with profit margins coming under pressure during 2013.”At last summer’s Insurance Day Summit, Validus Re CEO Kean Driscoll spoke about the changing dynamics of investment capital in the global insurance market saying that if clients moved away from traditional treaty reinsurance product to alternative structures, such as cat bonds, then changes within the industry should be expected. He forecast that reinsurance companies may start to manifest themselves into “more asset managers, positioning themselves between buyers and capital provider to leverage their opportunities”.Florida’s Citizens Property Insurance made a 40 percent saving through its $250m catastrophe bond last month compared to the deal it got on its record-setting Everglades Re 2012 $750 million catastrophe bond, which was also listed on the Bermuda Stock Exchange. The 2013 bond notes were sold at a final cost of 11.08 percent, while the 2012 transaction cost Citizens 19.07 percent. The coupon paid to investors is 10 percent (versus 17.75 percent in 2012).Citizens estimates the deal will translate to a saving of nearly $60 million over the three-year programme.“This action continues Citizens’ goal of transferring risk to the private sector by working closely with nontraditional capital markets, and further protecting our policyholders and all taxpayers in Florida,” said Citzens chairman Carlos Lacasa. “Citizens has emerged as an international leader in risk transference and our achievements are being recognised by financial markets around the world.”In its market outlook, Aon Benfield reports that traditional reinsurance capital grew 11 percent during 2012, totalling $505 billion.The report summary noted: “If the new price points available from the ILS and collateralised markets persist clearly a big question given the size of recent moves then the strategic options for property insurers expand greatly.”It goes on: “Insurers and reinsurers are likely to find additional innovative ways to use the ILS and collateralised markets. We expect securitizations of complex commercial property, commercial liability and other new risks to access these alternative sources of risk transfer. Insurers will closely examine potentially diversifying coverage options and use the increased capacity to compete and grow.”