Bermuda is bringing together the elements needed to develop and trade securitised risks. William Woods explains.

Bermuda is now the world's largest offshore insurance market with over 1,500 insurance companies and total assets in excess of $100 billion. It also has intellectual capital - some of the brightest minds in the insurance industry live and work in Bermuda. Bermuda based insurance companies now own or manage more than 25% of the underwriting capacity of Lloyd's.

Based on this intellectual capital, Bermuda is now the innovative centre for insurance securitisation - the funding of traditional insurance risks through the issue of traditional capital market instruments. True convergence of the two is greatly simplified in the offshore world. For example, in the United States there are separate regulatory bodies and statutes to regulate securities, commodities and insurance products. Innovative products which cross any of these boundaries require inordinate amounts of effort to develop and may end up not suiting the true needs of the issuer or the investor. In Bermuda, these obstacles are minimised.In 1997, The Bermuda Commodities Exchange (BCOE) was launched for the purpose of listing for trading, futures contracts and options. The BCOE trades an options contract based on the Guy Carpenter Catastrophe Index (GCCI), The GCCI measures the insured damage to homeowners' properties in the USA caused by atmospheric perils such as hurricanes, tornadoes, thunder storms, wind storms, hail and winter storms. Designed to underlie financial contracts and facilitate the transfer of catastrophic risk, the GCCI expresses the industry's loss in the form of a loss-to-value ratio or damage rate.

BSX insurance strategy
The Bermuda Stock Exchange (BSX) is the world's first fully-electronic offshore securities market. In operation since 1971, it currently lists more than 300 securities. The BSX market capitalisation (excluding mutual funds) is in excess of $90 billion with 1998 trading volume over $26 billion.
The BSX is an affiliate member of IOSCO and the FIBV (the international organisations of securities commissioners and stock exchanges), and is recognised by the US Securities and Exchange Commission (SEC) as a designated offshore securities market under Regulation S.
Adding value to Bermuda's offshore insurance market is an important focus for the BSX. Our strategy includes the following:
• Listing Bermuda based insurance companies, such as ACE, XL Capital and Mutual Risk Management.
• Creation of the Bermuda Insurance Index, which tracks the major Bermuda-based insurers, as well as other insurance/hybrid indices, benchmarks and trigger points.
• Listing cat bonds and other risk securitisation products.
• Development of CATEX Bermuda, the first offshore electronic risk exchange to automate the process of ceding, trading or purchasing risk, as well as for trading risk-related derivative products.
We believe the BSX is perfectly placed to complement our indigenous insurance industry and to help in the securitisation process, whereby the traditional capital markets are increasingly converging with the traditional insurance markets.

Listing insurance companies
ACE, XL Capital and Mutual Risk Management are already listed on the BSX. This combined show of support for Bermuda has lifted the BSX to a market capitalisation in excess of $90 billion. We are now seeking to list all of the Bermuda based insurance companies that are public companies.

The Bermuda Insurance Index
The BSX jointly created this index with FTSE, one of the world's leading index companies. The index tracks the growth of the publicly listed Bermuda insurers who have mind and management on the island. Currently including 10 companies, the index is market capitalisation weighted, calculated in real time and published on both Reuters and Bloomberg.
The index is already tradable in the form of an index tracking investment fund (which tracks the index by investing in the constituent insurance companies), and in future we hope to introduce an options contract on the index.

Listing insurance related securities
Special purpose vehicles (SPVs) issuing catastrophe risk bonds are the simplest and, to date, the most successful form of insurance securitisation. High profile cat bond issues to date include the Trinity Re bond issued in 1998 and the Trinity Re 99 Bond issued this year. The Trinity Re deals have been launched by Centre Solutions, one of Bermuda's most innovative reinsurance companies.

The majority of these issues created bonds and/or preference shares in a private placement and did not list the securities on an exchange. However, as the industry begins to move towards wider distribution, listing will become an important feature.

Developments for Bermuda that strengthen this trend, include the creation of Arrow Re by Goldman Sachs and Lehman Re by Lehman Brothers. In both cases the stated rationale of these companies is to act as “transformer vehicles”. In other words, they will write traditional reinsurance contracts and then seek to securitise the risk by issuing capital market instruments such as bonds, options and swap contracts.

In addition, Bermuda has introduced new legislation that facilitates the incorporation of SPVs and transformer vehicles in Bermuda, thus developing the island's capabilities as a “one-stop-shop” for incorporation and listing.

The listing imperative
Most insurance companies and investment banks now state that listing will be imperative as cat bonds gain popularity. They also support the development of the BSX as “the cat bond destination” for the insurance world. There are three prime reasons in favour of a BSX listing:
• Enhanced marketability - As these deals are marketed more widely to institutional investors in Europe and Asia, a listing will become more important. Many capital market institutions are strictly limited in the extent to which they can invest in “unlisted” securities.
• Systems access - The BSX is developing its GlobalScrip electronic clearance and settlement system to process restricted securities in a “name on register” environment that ensures that only eligible investors may hold the security.
• Visibility - Listing on the right exchange will raise the visibility of the securities by providing daily pricing and information on Bloomberg, Reuters, and the internet (www.bsx.com). Many of the deals to date have not enjoyed wide price/information dissemination.
• Convenience - The BSX is the only stock exchange in the world with a set of specific listing regulations designed exclusively for insurance securitisation products. The BSX has a special, fast-track listing procedure for SPVs which are issued only to accredited investors, and will list a cat bond within seven days at very competitive fees.

CATEX Bermuda
The BSX has signed a heads of agreement with the Catastrophe Risk Exchange (CATEX) to develop an offshore insurance risk exchange market in Bermuda called CATEX Bermuda. CATEX Bermuda will provide access for Bermuda based companies to the fully electronic trading and communications system provided by CATEX.

CATEX members can:
• Access the unique new distribution mechanism of an electronic posting system.
• Cede, exchange or purchase risk in predefined packages with different geographic locations and different perils. There are no limitations on the types of risk or the geographic locations that can be offered.
• Trade risk-related derivative products, such as put and call options on industry standard indices. The business model envisages that traditional capital market players, like banks and hedge funds, will also be able to utilise this market - thus bringing risk issuers and the traditional capital markets closer together.
• Communicate with the other members through the e-mail and collaborative messaging tools in the system over a secure, encrypted intranet.
The size of this new global, electronic market is potentially enormous and - given Bermuda's pre-eminence in specialist insurance and reinsurance - this is the obvious place to achieve this.

Invitation to join
We believe that CATEX Bermuda will be a tremendous success and invite insurance companies worldwide to join as members. The key advantages of CATEX Bermuda are as follows:

1. CATEX Bermuda provides access to an existing, internet based trading system which is extremely powerful and which has been universally acclaimed by all those who have used it.

2. CATEX in New York already has over 70 subscribers, over 500 users and over 800 postings of diverse risks available on the system. The system has also been introduced into Lloyd's.

3. CATEX Bermuda is an independent and neutral exchange, as we are not owned or promoted by any one group of insurers, brokers, or investment banks.In an increasingly competitive market place only those companies with a competitive advantage will succeed. CATEX's sophisticated trading and communications system will be part of that competitive advantage.

BIDS
BIDS is a secure, one-to-many document transfer and tracking system designed to simplify the process by which brokers worldwide make submissions to reinsurance underwriters in Bermuda.

Bermuda reinsurers have identified certain common problems which BIDS has been designed to alleviate:
• Submissions take longer to reach Bermuda - courier-based deliveries can take up to 72 hours and are quite costly for brokers.
• Faxed submissions are prone to mechanical failure, often incomplete and illegible, and always insecure.
• Conventional e-mail based submissions, especially those with large attachments, suffer from a variety of disadvantages including network incompatibility.
• Brokers spend too much money sending duplicate submissions to multiple reinsurers.

The BIDS solution
• Simple web browser based system - no learning curve or special software.
• Secure one-to-many document transfer.
• Transparent movement of documents from desktop to repository.
• Submission receipt confirmation.
• Complete submission tracking.
• Privacy.

Who will use BIDS?
• Brokers who wish to save back office processing time and money through the elimination of repetitive submissions.

• Brokers who desire faster turn around on submissions.

• Underwriters who want to process submissions faster, and with less confusion.

Who are the founders of BIDS?
Reinsurance partners:
• LaSalle Re.
• XL Mid Ocean Re.
• IPC Re.
• Renaissance Re.
• Terra Nova Re.

Financial services partner:
• Bermuda Stock Exchange.
Technology partners:
• Microstate Corporation.
• Logic Communications.

William Woods is ceo the Bermuda Stock Exchange. Tel: + 1 (441) 292 7212; fax: +1 (441) 292 7619; e-mail: (ceo@bsx.com).