Ratings agency A.M. Best believes that the Island’s wave of new entrants in the reinsurance industry could increase competition for business in Europe.

Best said that legislation introduced in Florida last month — which will result in the state taking on much of the catastrophe reinsurance risk itself in order to reduce homeowners’ insurance premiums — could free up $2 billion to $4 billion in reinsurance capacity and persuade the Island’s newcomers to seek more business in Europe.

The ratings agency also reported that most global reinsurers had enjoyed a strong 2006 because of a lack of catastrophe losses and strong renewal rates after the busy 2005 hurricane season in the US.

“New capacity in the form of Bermuda start-ups and sidecars will become an increasing source of competition in Europe given the recent events in Florida, which is expected to free up an additional $2-4 billion in capacity,” Best said in its report. The new entrants, combined with the increased capacity of established companies from strong earnings, may prove to be the disruptive longer-term force to the current favourable pricing environment.

“However, A.M. Best anticipates that due to improved balance sheet strength, better risk management controls and overall adherence to underwriting discipline, European global insurers are positioned to absorb volatility of earnings from unexpected events.” The profitable 2006, however, was leading to increased competition in the market with ample capacity widely available, said Best. Insurers, bolstered by last year’s profits and improved capitalisation, would be retaining more risk and ceding less to reinsurers. Sidecars and catastrophe bonds had been widely used to increase reinsurance capacity, but they had not fully replaced lost capacity, said Best.

“In A.M. Best’s view, the recent winter storm in Europe (Kyrill) with an insured market loss of between $6.6 billion to 9.1 billion is a timely reminder of the volatile nature of non-life reinsurance,” the agency said.