A number of proposals from hedge fund and private-equity firms could lead to the establishment of several new Bermuda reinsurance companies.

The most high-profile of these is a proposal from Jeffrey Greenberg, former chairman and chief executive of Marsh & McLennan Cos., to set up a new Bermuda company with capital from a private-equity firm he and partners are establishing. (See separate story)

Mr. Greenberg?s proposal is one of several such business plans to be put on the table since Hurricane Katrina, people familiar with developments said.

Only two or three of the new companies are expected to successfully get off the ground in contrast to the dozen or more reinsurance start-ups being founded on the Island after the September 11, 2001 terrorist attacks and 1992?s Hurricane Andrew.

?The industry is in much better shape than it was after major losses 12 years ago, or even five years ago,? said Ian E. Dilks, a London-based partner in PricewaterhouseCooper?s global insurance industry services unit.

?If there are incorporations, it will be the exception rather than the rule.?

Katrina ? the devastating August 29 hurricane that swept the Gulf Coast region ? threatens to be the costliest insurance event ever. In total, the storm damage could sap up to $60 billion from global insurance and reinsurance markets. Historically, costly catastrophes cut the capacity that established players have to sell new policies, pushing up demand and rates. This scenario has, in the past, created opportunities for newly capitalised companies to step in.

The reinsurance policies that insurers buy to protect themselves against losses from policies sold to protect homes, marine and energy operations are predicted to rise up to 40 percent more when renewed for 2006. Likewise, insurance rates are expected to go up. Under a reinsurance contract, a reinsurer contracts to assume some of the risk in policies that insurers sell to individuals and companies.

Higher rates are good new for insurers and reinsurers, but companies must be adequately capitalised to take advantage of the chance to sell more policies. While Katrina claims have made a dent on shareholders? equity ? a number of Bermuda reinsurers saw estimated claims equal to 40 percent of shareholders? equity ? companies have wasted no time in replenishing funds by tapping capital markets for some $5 billion, squeezing funding for start-up ventures. Numerous other factors, from a shortage of management to more stringent capital requirements from AM Best, the oldest insurance rating agency, could also limit incorporation activity.

New reinsurers backed by cash-rich hedge fund and private equity firms could prove the exception. These sectors are keen to set up ventures focused on selling short-tail, catastrophe reinsurance policies, according to a cross-section of industry executives speaking with . Short-tail policies are ideal for investors that don?t want to be locked in, because claims are generally settled within a year. Casualty insurance policies claims are considered long-tail, sometimes taking decades to be fully settled.

Hedge funds have been investing in the property-catastrophe reinsurance market for several years because fund managers like the high risk/high return profile of these investments. Investment have ranged from reinsurance-linked investments, such as catastrophe bonds, to backing full-fledged reinsurance companies, like Bermuda-based CIG Re, and Swiss Glacier Re.

Catastrophe bonds were created in the wake of 1992?s Hurricane Andrew as a means of allowing insurance risk to be sold to institutional investors in the form of bonds, thus spreading risk through capital markets instead of by traditional reinsurance means.

?Hedge funds are looking for higher, risk-related returns and that is exactly what the property insurance and reinsurance markets offer? it is a question of returns and your time horizon,? said John S. Scheid, the New York-based head of PricewaterhouseCooper?s global insurance industry services unit.

While some already established hedge fund-backed reinsurers will have been hard hit by Katrina claims, an appetite for this kind of risk is likely to prevail. The extent of Katrina?s effect on these companies may never be fully known because they are privately held.?There is still a significant amount of capital in the hedge fund world looking for deployment,? said Neil Patterson, a partner in the Bermuda office of accounting firm KPMG.

?We are aware of a couple of hedge funds in the US considering setting up reinsurance companies with their own capital...some of those things could be in motion currently,? said Mr. Patterson. ?If they feel the return ratios are right, and rates increase, there will be hedge fund players coming in to the market.? Mr. Patterson is co-ordinator for KPMG Bermuda?s alternative investment and banking practice, which provides audit, advisory and tax services to hedge fund clients.

The sector is also attractive because it is seen as an asset class with little correlation to equity and bond markets.

Private equity firms also know this market well, with some having invested in a number of the post-9/11 reinsurance companies. Bermuda companies, both established and start-up, attracted about $15 billion in new capital after 9/11. ?Bermuda has shown a capability to respond more quickly to changing circumstances,? said Mr. Dilks, with the Island?s insurance and reinsurance sector showing a repeated ability to capture significant new capital when business opportunities improve.

Mr. Greenberg?s proposal would be funded on the private-equity side by Aquiline Capital Partners, the firm he and partners from New York-based Venturion Capital are currently raising money for.

While Mr. Greenberg, as one of the best known in the industry, may be ideally positioned to tap talent, others may find it difficult to recruit the seasoned management and specialists a reinsurance venture requires. The 2001 start-ups ? including Axis Capital, Arch Capital, Endurance Speciality and Montpelier Re Holdings Ltd. ? snapped up much of the industry?s talent.

?Three years ago there was an opportunity but it was challenged by the need for senior management, underwriting, accounting, and actuarial talent,? said Mr. Scheid. ?To form a whole new set of companies would be a stretch on management capacity.?

Another difference this time around is that new entrants have a less compelling business plan. The 2001 wave of companies was eagerly received by investors who believed ?clean capital? was just what the industry needed. ?There are a couple of efforts underway; frankly I?m not over-excited,? said one person familiar with proposals being considered. ?I would be shocked if more than three start-ups got done.?

In 2001, new company proposals could play on investors being wary of putting money into established companies. Some companies, including Bermuda-based ACE Limited, have been plagued by mounting ?legacy? claims from policies sold in prior years.

Four years on, the 2001 companies are still considered to have ?clean? or unencumbered capital. ?The new companies have not been around that long; they are not suffering the problems of the past,? said Mr. Dilks. ?If you have an efficient mechanism to put capital into those companies, why would you go and set up new companies.?