Bermuda may not be the best long-term choice for the post September 11 insurance start-ups, according to a leading ratings agency, Fitch Ratings.

And it said that the Class of 2001, the Bermuda insurers that formed to take advantage of the capacity crunch after the September 11, 2001, terrorist attacks, face significant disadvantages that could hamper their competitiveness.

It cited problems with limited office space and a shortage of people were listed among the disadvantages of locating in Bermuda adding that companies only set up here because they could do so quickly.

The report, “The Bermuda Class of 2001: What Do They Do After Graduation?” argues that, despite enjoying a favourable regulatory climate and an absence of legacy problems, the start-ups currently are nothing more than alternate forms of capacity that cannot effectively compete with strong, well-established peers.

And it added that the next 18 months will be a pivotal time for the seven main companies in determining the companies' long-term viability, according to the report.

The report said: “Fitch speculates that speed of organisation may have been the primary driver in the selection of a Bermuda domicile even though it might necessarily be the best long-term choice.”

Despite an absence of legacy issues, a more favourable regulatory environment and other competitive advantages, Bermuda-based start-up insurers faced significant disadvantages compared to established companies which may limit the start-ups from effectively competing in certain lines of business.

It went on to say that by locating themselves in Bermuda, the start ups - listed as Allied World Assurance Co. Ltd., Arch Reinsurance Ltd., AXIS Specialty Ltd., DaVinci Reinsurance Holdings Ltd., Endurance Specialty Insurance Ltd., Montpelier Reinsurance Holdings Ltd. and Olympus Reinsurance Ltd. - only increased their problems.

“The choice of a Bermuda domicile exacerbates a disadvantage faced by start-ups: the development of a company infrastructure. Start ups have to locate a facility, hire staff and set up various underwriting claims handling and accounting systems. Bermuda is a 22-square-mile island with very limited available office space and human resources. These constraints further focus on start-ups on certain lines of business.”

The report added that by necessity, the start-ups have been limited to low volume/high dollar transactions such as reinsurance generally as well as primary property catastrophe and excess casualty insurance. It added: “Also if a start-up chooses Bermuda for the tax advantages, it is precluded from doing business in the United States, for to do so would expose it to US income tax. That makes it very difficult for start-ups to sell auto, homeowners' or middle-market commercial primary insurance, since those lines all require a presence in the United States.”

Fitch said that a broad-based hard market provides the start-ups with an opportunity to write several lines but also represents a great risk to them.

And it said that this risk is that market pricing works in a hard market but, as market prices soften, risk selection and underwriting skills become critically important.

“Fitch is concerned that the start-ups will not have the underwriting infrastructure and historical databases needed when the market softens. As a result Fitch sees danger in being too diversified too quickly.”

And in its conclusion said that on balance, it believed that any start-up is competitively disadvantaged compared to a strong well-established peer with various problems facing the companies.