The Bermuda Commodities Exchange (BCE), a new Island-based exchange whose first members are AIG, Chase Manhattan and Guy Carpenter, will begin trading insurance derivative products in April, it was revealed yesterday.

Authorised by a private act of Bermuda parliament, the new exchange will be owned by its members who will be able to buy and sell contracts that track on the Guy Carpenter Catastrophe Index.

This index measures insured damage to homeowner property in the US caused by hurricanes, tornadoes and winter storms.

BCE, a major development in the uniting of insurance and capital markets, will offer institutions a new way to hedge and invest in catastrophic insurance risk.

It is believed Goldman Sachs & Co., CNA Financial Corp., Allstate Corp. and Aon Corp. could join insurance giant American International Group, Inc., Chase Manhattan, the largest bank holding company in the US, and Guy Carpenter & Company, Inc., the leading reinsurance intermediary, as members.

The new exchange's offices are at 29 Richmond Road, the same address as AIG's Bermuda offices.

A letter of intent has been signed between BCE and the Chicago Board of Trade to provide services to the new exchange and offer members of the CBOT trading privileges.

The Bermuda Monetary Authority will provide regulatory supervision and trading will be in US dollars.

"We have created a mechanism equally attractive to institutions seeking to hedge or invest in catastrophe risk,'' BCE president Thomas Heise said yesterday.

"The investors, using an index that will provide standardised, detailed information, can add a potentially lucrative new asset class to their portfolios.'' The exchange's initial products will be contracts covering insured homeowners' losses resulting from hurricanes, tornadoes and winter storms.

They will cover seven areas of the US for single events and aggregate losses during six month periods, January to June or July to December.

Contracts covering future risk periods will also be offered.

The Guy Carpenter Catastrophe Index "is unprecedented in its detail because it will provide information on homeowners' insurance in force and loss experience at a zip code level,'' BCE said.

The index will be updated quarterly by IndexCo, LLC, a newly formed subsidiary of Guy Carpenter.

Mr. Heise, reported to be a former director of reinsurance strategy at AIG, said disclosure requirements while the exchange seeks out new members prevented him from further comment.

BCE's release comes four months after the Bermuda Stock Exchange (BSX) and New Jersey-based Catastrophe Risk Exchange Inc. announced CATEX (Bermuda), a joint venture insurance risk exchange. BCE gazetted its private act in February, 1996 but AIG did not return calls by The Royal Gazette for details.

CATEX CEO Frank Fortunato said yesterday that: "We do not view the Bermuda Commodities Exchange as competition for CATEX.'' CATEX is a trader and seller of reinsurance and insurance. It allows risk bearers to exchange risk. Institutional investors can use CATEX to underwrite a layer of risk, he said.

CATEX's competitors are intermediaries. The Chicago Merchantile Exchange is anticipated to be among the BCE's competitors.

CBOT chairman Patrick Arbor, quoted in a Crain's Chicago Business story, said: "By forming a strategic link with AIG and an offshore exchange in Bermuda we may be able to make new progress with more products and perhaps a different regulatory treatment. The offshore nature of the initiative is of some interest, but it is not what takes us there.'' And an unnamed CBOT senior executive said: "The Securities and Exchange Commission has taken a very dim view of various offshore exchanges who have been trying to trade individual futures on equities. We want to make sure our Washington regulators are comfortable with this venture.'' The BCE includes a CBOT unit which would take a controlling equity stake in the electronic commodities exchange for a ten to 15 percent share of gross revenues and trading privileges for its members. CBOT staff and members would also earn fees for technical assistance, Crain's said.

At last month's Bermuda Insurance Symposium, Dr. Richard Sandor, a leading authority on securitisation of insurance, said that convergence of insurance and capital markets is inevitable.

He said that these two markets are destined to converge because of an imbalance between insurance capital and US assets. Insurance capital available does not support US asset base, he said.

Mr. Sandor is president and CEO of CNA's Hedge Financial Products Inc.

BUSINESS BUC