A trend for insurers to cede more and more of the risk on their books to reinsurers could sustain a capacity crunch, but it also means there is plenty of business to be had by Bermuda reinsurers.

This perspective was given by industry veteran and CEO of Montpelier Re, Tony Taylor, speaking to the current state of the market for Bermuda reinsurers. Mr. Taylor told a group of his peers, listening to a panel discussion at last week's Hawksmere 17th International Reinsurance Congress, that he had noticed a propensity, since early in the year, for global insurers to buy increasing levels of reinsurance.

In particular he said one company, in the last ten months, had sought reinsurance (from various reinsurers, not just Montpelier) for a dozen programmes, and that in at least one of those cases, the company had sought reinsurance for all but $2.5 million of the risk in one of its programmes. Mr. Taylor told the audience he found that development surprising, as the company - which he did not name but referred to as "a major group" - was seeking reinsurance at an attachment point ($2.5 million) so low as to be a fraction of its gross written premium.

Mr. Taylor said his interest was sparked by that and prompted him to look a little deeper. What he found was that the company was spending close to 40 percent on reinsurance but that was not that far removed from the 35 percent that was being spent on reinsurance a few years earlier. But after further number crunching, Mr. Taylor found that the raw figures showed that in terms of dollars, 13 times more was being spent by ceding more risk to reinsurers.

"I found that the monetary spend had increased by a significant dollar amount," Mr. Taylor said adding he found the same trend to hold true for about a dozen other major insurance companies. Looking at the reasons behind the rise in purchase of reinsurance, Mr. Taylor said although reinsurance rates had gone up since the 2001 turn in the market cycle, he would have expected insurers to curb their reinsurance spend by taking on greater levels of retention.

Although Mr. Taylor said the market cycle was beginning to soften and prices, especially along certain lines, were going down, this increase in cover could reduce the savings companies would have from lower rates.

Mr. Taylor said "crap underwriting" from 1997 to 2001 and all of the A&E (asbestos and environmental) issues from the same time frame may not have yet been realised as claims but products were being sought to cover those years. He added that the more severe predictions of catastrophe modelling scenarios could also be prompting an increase in the purchase of reinsurance cover as well as more stringent expectations from stakeholders, including rating agencies, analysts and shareholders. Mr. Taylor said stakeholders were putting extra pressure on companies to `deliver no surprises' in their financial results. He added that the need to reduce volatility in earnings could be a factor in companies buying up more reinsurance.

However, Mr. Taylor said a crisis could ensue as "what is the state of the market to take on all of this reinsurance," he asked.

He pointed out that the level of capital that was paid out by the sector after such events as 9/11 meant that although new capital had been injected into the marketplace, it had not filled in the gap and the reinsurance sector remained under-capitalised. Despite the challenges that this equation creates in the marketplace, Mr. Taylor said his view of the industry in Bermuda was adapted from something Mao Tse-Teng once said: "There is chaos in Heaven; the situation in Bermuda is excellent."