GATINEAU, Quebec — The ultimate impact of the influx of alternative capital into the insurance industry is unclear, but Canadian observers are sure about this much: Investors need to understand the type and magnitude of risks they are taking on.

Julie Dickson, superintendent of the Office of the Superintendent of Financial Institutions Canada, said her office was taking a close look at the effect of catastrophe bonds and insurance-linked securities on the stability of insurance and reinsurance markets.

“When a flood of money goes into an industry, there can be an impact that we as regulators may find not to be helpful,” Ms. Dickson said. “It can lead to the underpricing of risk.”

Noting that low interest rates have caused many institutional investors to consider catastrophe bonds in their search for higher-yielding investments, Ms. Dickson cautioned that investors need a thorough understanding of the underlying risks covered by the bonds.

“Insurance can be a dangerous business for those who do not understand it,” she said.

Ms. Dickson made her comments during a keynote address at the National Insurance Conference of Canada in Gatineau, Quebec, last month.

Speaking during a panel discussion, Toby Stubbs, senior underwriter for London-based Pembroke Managing Agency Ltd., said the amount of new capital in the market also is a concern.

“I think some in the broker community has used it as way to leverage where they want to go on pricing,” he said. “My view is that we can have a perfectly sensible conversation with our clients around pricing without them needing to access these new capital sources.”

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Fellow panelist Jacques Q. Bonneau, chairman of Hamilton, Bermuda-based Ace Tempest Re Group, said the volume of insurance-linked securities in the market has affected the prices reinsurers can charge cedents in certain segments.

“The demise of the traditional reinsurance market has been greatly exaggerated, but where you will see the capital markets come in and make an impact is in retrocession,” Mr. Bonneau said.

Dominic J. Addesso, president of Hamilton, Bermuda-based Everest Reinsurance Co., said that despite the recent surge in ILS, traditional reinsurers will retain a dominant share of the market because of their ability to offer cedents more customized solutions versus the “plain vanilla” offerings from the capital markets.

“We do see an entrenchment of capital markets in this business, but there is a ceiling in terms of what they can offer,” Mr. Addesso said, adding that the questions surrounding claims will limit the growth of catastrophe bonds. “Relationships matter when it comes to claims. If you have a longstanding relationship with a cedent, the conversation about what is a covered loss is a little easier.”

Mr. Bonneau agreed.

“Since these bonds trade on the secondary market, it's not always clear who your counterparty is,” he said. “Insureds may well end up having conversations with the legal representatives for the bondholder, which I suspect will be an extremely different conversation than you would have with a reinsurer.”