Yesterday the ICAP conference kicked off with a keynote speech from Brian Duperreault, chairman and chief executive officer of ACE Limited. Mr Duperrault talked about the trends and potential developments in Bermuda, especially his belief that the captives and the insurance companies on the Island will at last begin to work together. The Royal Gazette publishes here the major part of his speech which will be of interest to all associated with the insurance industry.

''Let me touch on trends in the primary and reinsurance industry which should be of interest to captives and then talk about the potential developments here in Bermuda.

'Captive growth often correlates negatively with the primary insurance cycle. When the market is soft and prices are weak, industrial companies often find that they can secure coverage for otherwise hard to place risks in the conventional insurance market and at prices that they themselves cannot or will not match. In this last down cycle however, captive growth actually continued at a comparatively high level. So much for conventional wisdom. This growth was centred in Bermuda but was happening independent of the emergence of Bermuda as a major force in the insurance and reinsurance world.

Let me focus first on the Primary Insurance market. Conditions there are - or more precisely, were - terrible. I say this because there is such a long lag between business conditions and reported results.

According to the Insurance Information Institute the US property and casualty insurance industry reported it's third consecutive decline in underwriting profitability for the year 2000 with a combined ratio of 110.5 %. Underwriting losses set a new record at $ 33 billion. Industry Net Premiums Written grew at an accelerated rate for the first time in several years by about 5.1 % and are projected to increase by a somewhat larger amount in 2001 as the effect of rate increase becomes evident.

Probably the single biggest driver of income gains for the property and casualty industry is investment income. Over the last few years slow growth in premiums, declining yields and continued claims payments reduced cash flow. For two years investment income actually declined but reversed itself in 2000 increasing by 5.1 % One very interesting note is the fact that Industry Statutory Surplus declined by 4.5 %.

After years of decreasing financial leverage and excess capital, the industry for the first time in a decade has seen premiums grow and surplus shrink diminishing slightly the excess capital that has plagued this business.

There is no question that the market in the US has turned. More interesting, the markets around the world are turning and at the same rate as the US. I've been in the business 28 years and have never seen the breadth and depth of this cycle. It is truly a global phenomenon.

In past cycles, reinsurance has led the way in reducing capacity but this time around it was the primary companies who began raising prices and it's the reinsurers who are the followers. Again, so much for conventional wisdom.

Trends in reinsurance pricing should be important for the captive insurance industry since one of the great advantages of being a captive is gaining direct access to the reinsurance market.

There are certainly good reasons for reinsurers to independently raise prices. Results for the industry through the year 2000 showed steady deterioration culminating in a combined ratio of 114.2 % according to the Reinsurance Association of America.

Operating income as a per cent of equity was a paltry 1.7 % which is hardly enough to keep capital invested into the industry. Even when capital gains are included the return for the year 2000 was only 4 %. Yet despite these anaemic returns capital continued to accumulate in the industry and operating leverage continued to fall throughout the last decade.

Let's look at a few key trends in the reinsurance area:

1. Capital. Over the last decade reinsurance industry surplus increased nearly 100 % from $ 12 billion to $ 24 billion. This was driven primarily by outstanding investment results and not by favourable operating results.

2. Consolidation. On the other hand as a result of a wave of acquisitions and mergers the number of reinsurers accounting for this capital declined from 65 to 33. The average capital per reinsurer increased nearly fourfold to $ 700 million per company compared with $ 186 million per company in 1991. Even more telling is the fact that the top four reinsurers accounted for 57 % of the industry total reflecting a high degree of concentration.

3. Operating Leverage. For at least the last ten years the industry has been unable to increase its operating leverage. When measured by premiums to surplus, leverage throughout the last ten years has been relatively stagnant rising from .9 to 1 to 1 to 1 in the year 2000.

4. Financial Leverage. Financial Leverage followed a similar pattern remaining constant at $ 2.90 of invested assets per $ 1.00 of surplus. And with average yields declining over the period it has become harder and harder for the reinsurers to produce a satisfactory return on capital.

5. The Emergence of Bermuda as a Reinsurance Centre. One more point of interest is the fact that most of the publicly traded reinsurers by market value are now located in Bermuda. V.J. Dowling of Dowling & Partners Securities in a presentation made two weeks ago pointed out that Bermuda companies accounted for 81 % of $ 21 billion in outstanding market value of the remaining independent publicly traded reinsurance companies. Ten years ago Bermuda companies accounted for only 20 % of the market value of publicly traded reinsurers. Quite a change... and I can assure you it wasn't because of taxes.

The message is clear, capital is moving in search of a higher return. Ultimately markets are efficient.

I mentioned that trends in reinsurance, particularly reinsurance pricing, should be important to captives but this brings me back to the potential trends in Bermuda. I find it fascinating that Bermuda houses the largest captive market in the world and the most innovative reinsurance market and yet the two do almost no business together.

Both grew independent of each other but will market forces change this? I think they should. As rates rise, captives will take on more risk, that is one of their primary functions. But how do you deal with volatility? Does the parent really want this risk? It certainly doesn't want its short term effects. Reinsurance rates are rising at least as fast as the primary so there is no relief there. I mentioned that this is a globally hard market so there is no safe haven of capacity.

Where does the captive go? Who are the world leaders in ART? - to the Bermuda insurance companies who specialise in the solutions business. Maybe it isn't ironic. Maybe it is the natural course of events but I believe that we'll see these two world class markets who live side by side on this very small Island finally do business together.''