Bermuda's new reinsurance companies have grown quickly due to the market's renewed concern for security according to a report released by A.M. Best on Friday.

As severe as the events of September 11 were, the reinsurance industry's current state is the result of a focus on investment earnings rather than underwriting, according to the article, "The Changing Faces of Reinsurance," which was in A.M. Best Co.'s annual report on the reinsurance industry.

Starting in early 2001, the reinsurance market began the long road to recovery from one of the softest market cycles on record. The combination of falling equity markets, lower interest rates and the realisation that core loss reserves would not be sufficient to cover loss-cost trends prompted a review of basic underwriting premises and restored operating fundamentals. However, the previous run-up in the stock markets lured the reinsurance community into a false sense of security and led to a general relaxation in operating standards. The capital gains recognised from equities, which represented half of the industry's surplus, provided an earnings buffer for the deteriorating underwriting conditions.

Looking back at accident years 1997 to 2000, which no longer are propped up by a robust stock market, the damage to the industry wrought by poor underwriting practices can be seen. In 2001 alone, the US reinsurance segment strengthened prior accident-year reserves by $4.1 billion.

Since September 11, there have been more than a dozen withdrawals from the market by companies that either ceased writing business voluntarily - such as Overseas Partners Ltd. and Scandinavian Re - or have gone into bankruptcy, including Taisei Fire & Marine. So venture capitalists saw opportunity in the post-September 11 hardening market and quickly formed several new, highly capitalised companies to fill the capacity void.