Ratings agency concerns on the financial strength of insurance companies could lead more in the sector to explore the viability of bank loans as a means to improve their capital position, says Des Potter, head of insurance within the financial markets team at Barclays.

Mr. Potter claims that as rating agencies have pressed companies to maintain a strong capital base in the aftermath of Hurricane Katrina, reinsurers are taking advantage of the abundance of banking capacity as a way of staving off a downgrade. ?Before Katrina there was far more bank capacity to support reinsurance debt than there was demand from reinsurers for that capacity,? he told Reactions. ?Now reinsurers are taking advantage of the soft banking market and are trying to renegotiate their letter-of-credit facilities on cheaper terms, for longer periods.? Mr. Potter cited Axis as an example of a company that has successfully managed flaws in its capital position through borrowing. He says Axis had a three-year $750 million capital facility, which it recently refinanced on better terms and with more flexible covenance.

Russell Fletcher, executive vice-president and chief underwriting officer of Bermudian reinsurer Montpelier Re, believes it is the well-capitalised companies that will fare well in the wake of Katrina. ?As this loss impacts balance sheets, capital raising could become difficult.

?Good companies will do fine but companies with weak balance sheets will struggle,? Mr. Fletcher said.

Barclays will be one of the main beneficiaries of this surge in demand for bank capacity, alongside HSBC, JP Morgan and Citigroup. Mr. Potter admitted that the discussions he is having this week in Monte Carlo at the annual reinsurance congress Rendez-Vous are very different from the discussions he thought he would be having prior to Katrina. ?Reinsurers were strong in terms of their capital and LOC capacity before Katrina hit, but the scale of the event could mean they need support from banks to cover claims,? he explained.

He added that some reinsurers will want the capital for another reason: to write attractive propertycatastrophe excess-of-loss business. ?Quite a few players this week have been talking about raising capital to take advantage of what they believe will be a spike in short-tail catastrophe prices,? he said.

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