Capital market reinsurance models such as catastrophe bonds, sidecars and hedge fund-backed reinsurance start-ups are an increasingly viable alternative to traditional reinsurance, a new report by Fitch Ratings says.

But such alternate models are likely to remain niche, with the cat bonds market unlikely to grow further due to inherent “structural issues” and the long-term future of hedge fund-backed start-ups dependent on their success across a market cycle, it adds.

Collateralised quota-share reinsurance vehicles, or sidecars, are considered more efficient and flexible than traditional start-up reinsurers, Fitch says. They will continue to prove popular with new capital wanting to access the retrocessional property cat reinsurance market – and soaring prices following a catastrophe – before exiting the market.

But Fitch says lower reinsurance rates next year will probably dent overall capital market funding for reinsurance.

“To the extent that hardening insurance market conditions diminish into 2013, Fitch would expect less overall utilisation of capital market reinsurance alternatives than recent experience in 2011/12,” the ratings agency said.

Fitch says the growth of alternative reinsurance models is a mixed blessing for traditional reinsurers. They allow them to manage exposures and capital, while providing fee income, but also act as competition and draw additional capital into the market, which has kept a lid on reinsurance pricing.