Bermuda may be unable to sustain the current boom in the reinsurance industry due to a lack of local intellectual resources and office space according to a special report on the reinsurance industry written by A.M. Best.

A section of the report entitled "D?j? Vu All Over Again?" concerning the similarities between the Bermuda start-ups post Hurricane Andrew and the start-ups post September 11, A.M. Best managing senior financial analyst Peter Dickey says the differences are vast in terms of both the strategies and market environment.

Mr. Dickey said while the formation of the Bermuda market in the early 1990s was focused almost exclusively on meeting the need for large property catastrophe coverage, the new wave of companies was set up to address the overall capacity crunch created by the unexpected losses for the September 11 terrorist attacks.

"The focus of these new start-ups, however, was not limited to property catastrophe risks but rather was on a broad range of reinsurance and insurance specialty-lines coverages, seeking to take advantage of cedants' security concerns by providing a substantial capital base," said the article.

As far as meeting expectations, the January 2002 renewal season fell short for some start-ups as the established companies maintained their slice of the pie by benefiting from both implicit and explicit "payback"mechanisms.

The article does say, however, that for the right price, capacity was not a problem and risks were placed.

"Nevertheless, the start-ups, not entirely focused on the catastrophe market, experienced significant growth in the first quarter of 2002, an indication of their acceptance by the market and the strength of the relationships harboured by the executives of these new companies," said the article.

The new companies' franchises were built around seasoned management and diversified insurance and reinsurance products including general liability, casualty, workers' compensation, catastrophe, aviation and marine coverage. Also favourable for the new companies were their clean balance sheets and substantial capital base, in most cases exceeding $1 billion.

The article added: "Uncertain, however, is the ability of these Bermuda start ups to build the necessary infrastructure over time, as intellectual resources and office space are in high demand and short supply on the island."

As a consequence of these limiting factors, the article said that many of the start-ups have relied on outsourcing their back-office needs, but this might not be an efficient, cost effective or adequate solution over the long term.

A.M. Best also questioned the staying power of the new start-up companies and questioned investors' exit strategies and the stability of the capital dedicated to the new companies, saying that consolidation was inevitable.

Weakened financial markets would likely preclude any public offering, and instead, the article suggested that companies may seek to merge or be acquired by existing operations.

A further difference between the post Hurricane Andrew start-ups and the current crop of companies, A.M. Best said that while the former offered acquirers sought after capabilities to augment their existing operational platforms, many of the new companies lack a unique franchise.

A.M. Best added: "However, when the market shifts, the new start-ups' demonstrated ability to deploy capital to underwriting, while maintaining pricing discipline, could make them potentially attractive candidates for acquisition."

While A.M. Best believed that consolidating was inevitable given the short term return expectations of many of the original sponsors, the article concluded: "But if history repeats itself, at least one or two of these newly formed companies might emerge as one of the top 35 reinsurers in the world."