Ariel Re's CEO advises Bermuda's monoline reinsurers against mindless diversification.

Monoline Bermudian reinsurers will be the most vulnerable to increases in the frequency and severity of catastrophe losses. This was the conclusion of a recent Standard & Poor's report, which has been hotly refuted by industry veteran Don Kramer. He does not believe they will be blown away arguing that the majority of reinsurers are currently overcapitalised.

In his capacity as chairman and CEO of Ariel Re, he said he refuses to “slavishly diversify his company” to satisfy rating agency concerns. Instead the company began to cautiously diversify by writing direct business in the first quarter of 2006. In addition, with the shortage in property catastrophe supply, Ariel Re could have expanded its monoline book of business further but decided against writing risks its team deemed to be too volatile.

Consequently, the reinsurer will aim for more appropriate diversification with the hope it “will be here after the next storm”, says Kramer.

This year's season is so far shaping up to be far less dramatic than initial projections. “We haven't seen one hurricane yet for 2006 where we insure risks,” adds Kramer. If this trend continues, hedge funds, which are increasingly investing in the insurance and reinsurance, will make more money than expected because their earnings are based on expected loss ratios. Kramer predicts this will bode well for the industry because it will encourage the flow of more capital into the sector.