MONTE CARLO, Monaco (Reuters)—The market for insurance-linked "catastrophe" bonds looks set to shrink this year as insurance companies digest changes to models the industry uses to set conditions and prices for the bonds, reinsurer Munich Re said on Monday.

Initial forecasts that the market could see at least $5.5 billion in new issues this year are hardly reachable now, Rupert Flatscher, head of Munich-based Munich Reinsurance Co.'s risk trading unit, told Reuters.

"It will more likely reach $4 billion," Mr. Flatscher said in an interview.

The cat bond sector, in which insurers transfer risks associated with natural disasters to capital market investors, finished 2010 on nearly $5 billion in issuance, its second highest annual total since the market was established in the early 1990's, according to the world's biggest reinsurer.

But new issuance so far this year is a modest $2.5 billion, including a $150 million bond for European storm risks that Munich Re itself brought to the market in July.

The market is being held back not so much by a lack of demand—even though investors had to absorb losses from several bonds that were triggered by the Japan earthquake in March—but rather by the reluctance of insurers to transfer risks to the capital market in the wake of changes to the hurricane model developed by risk assessor Risk Management Solutions Inc., Mr. Flatscher said.

"We now expect some insurance transactions at the end of 2011 or early 2012 for hurricane risks, once insurers have adapted to the new (RMS) model," Mr. Flatscher said on the margins of the annual meeting of the reinsurance industry in Monte Carlo.

The market, which currently has a volume of around $11 billion including new and outstanding bonds, has not been damaged by investors' losses on Japan earthquake bonds.

"Cat bonds are still a good opportunity for many (players) to diversify their risks," Mr. Flatscher said, adding that volatility in equity and government bond markets was increasing the relative attractiveness of catastrophe bonds.

"New issuance volumes of $10 billion or more are thoroughly conceivable in the medium term," Mr. Flatscher said.