An independent report on Bermuda?s insurance industry has concluded that ?short-term capital will continue to gain ground over long-term capital in supporting catastrophe risk?.

The report, by Conning Research & Consulting Inc., which is indirectly owned by Swiss Reinsurance Company, says: ?The pace, but not the direction, of this evolution will be influenced by the near-term incidence of catastrophes. As this change occurs, the role of reinsurers will evolve, focusing increasingly on origination, packaging, and pricing transactions, but not on bearing the bulk of the risk.?

The report added: ?Bermuda will be well placed in this evolution, as a talent-friendly and capital-friendly jurisdiction. The lean model of Bermuda can become leaner still, as the island?s ?carriers? start to carry less, and evolve instead into highly sophisticated intermediaries and designers of vehicles to transfer risk to the capital markets.?

Entitled ?Bermuda: The New Capital of Insurance??, the report is available for $1,750 from Conning?s website, www.conningresearch.com. The study identifies five ?broad challenges? facing the Bermuda market, which it lists as follows:

Infrastructure and resource constraints on the island;

The potential for increasing competition from other locations;

Internal political risk, including the potential impact of Bermudian Independence from Britain;

External political risk, deriving from actions of other governments or regulators to challenge some of the advantages currently enjoyed by the Bermuda market; and

The risk of regulatory failure and consequent loss of broker and policyholder confidence.

The report?s authors also list five possible future directions the market might take. ?Across all these possibilities, one constant can be comfortably predicted: Bermuda will continue to play a formative role in the evolving relationship between capital and talent in property-casualty insurance,? the report says, adding: ?There are undoubtedly racial and economic tensions on the island, but providing international business (including the insurance community) continues to share the fruits of its prosperity with its hosts, these tensions should remain containable.?

The five ?scenarios that span the range of probable outcomes for the future of the market? are:

Continued high incidence of catastrophes (particularly US catastrophes) that ?keeps rates high, sustaining growth for the companies on the island.? Some incentive to diversify to other lines of business might be driven by the desire to write a balanced book, but opportunities in catastrophe reinsurance keep this incentive muted. ?This could be the most positive scenario,? the report says.

4Lower catastrophe incidence, which ?leads, over time, to falling rates. Bermuda?s insurers are compelled to seek new lines of business and geographic markets. More business is written through affiliates established off the island.? This scenario may be gaining ground after the relatively low impact of the 2006 catastrophe experience to date, but, the report says, ?the negative implications will be held off for at least another year?.

Increased competition from other domiciles, which ?leads to stagnation or contraction of the Bermuda market.? While some other locations, such as Cayman, may aspire to copy or emulate the success of the Bermudians, the report states, ?we do not see a serious threat to the island?s franchise emerging in the near term?.

Regulatory failure in Bermuda, which ?leads to a backlash in the US or other markets.? Under this scenario, resentment at Bermuda?s success and the lack of a ?level playing field? with other domiciles prompts retaliatory action.

?We see this scenario as unlikely,? the report said. ?The temptation among elected US politicians to take potshots at Bermuda undoubtedly will remain, and likely would grow greater in the event of a much-publicised regulatory failure. However, the consequences of such a failure would have little impact on Main Street USA, whereas any move that threatened to push up the cost of critical insurance coverages to major US corporations would likely spark an angry reaction.?

Internal tensions between Bermudian and expatriate communities, which ?lead to tighter government restrictions on expatriate rights and access to the island. Pressure builds for independence from the UK.?

The report concludes: ?Broadly, we are optimistic about the future of the Bermuda market. We consider that the Bermuda corporate model is well suited to the constraints of the Island, and we do not consider the negative scenarios described above as being particularly likely, although they should not be ignored.

?We believe the Bermuda market will continue to innovate in improving the efficiency of risk transfer.?