n the reinsurance world, Bermuda has for years staked its claim as the market?s laboratory, where innovation driven by upheavals in the dominant US property/casualty segment has produced a kaleidoscope of startups and multitasking underwriters.

But for the coming two years, a development on the regulatory front may overshadow Bermuda?s cutting-edge performances. By the end of 2007, all 25 of the European Union?s member states must adopt the EU?s Reinsurance Directive, and Ireland?s capital may prove to be this experiment?s guinea pig. The directive sets a regulatory framework for reinsurance that, among other things, establishes minimum capital standards for reinsurers and abolishes collateral requirements for alien reinsurers. The latter feature will be a trade tool for the EU against US regulators, who require foreign reinsurers to put up 100 percent of liabilities in collateral.

With the adoption phase barely under way, the directive already is having an impact.

In a report on the global captive insurance market, consultant Advisen Ltd. claims that, ?right on cue,? European captive formations ?nearly stalled? as Ireland ramped up its adoption rhetoric. The number of captives in Europe?s biggest domiciles ? Dublin, Luxembourg and the Isle of Man ? fell slightly in 2005 after several years of rapid growth, Advisen noted.

Citing Ireland?s pending adoption of the Reinsurance Directive, Bermuda-based special-risks reinsurer ESG Re Ltd. said it would exit traditional reinsurance and concentrate on direct marketing.

ESG Re said the capitalisation required by the directive would make the market unattractive for future business.

Ireland has been working hard to establish its capital, Dublin, as a European financial centre. In recent years, Dublin has attracted dozens of branch offices and EU satellites of global insurers and reinsurers. Its captive sector has grown quickly to about 200.

Irish regulators are enthusiastic about the Reinsurance Directive and even talk of imposing standards that exceed the minimum. Here is Liam O?Reilly, former chief executive officer of the Irish Financial Services Regulatory Authority, in a January letter to the Irish Times:

?Ireland will be among the first countries in Europe to implement it, resulting in a full solvency regime for reinsurance companies here. Indeed, the Irish regime will go beyond the strict minimum requirements of the directive by requiring adherence to explicit standards of corporate governance and by requiring particular disciplines in relation to finite reinsurance, in line with [International Association of Insurance Supervisors standards.?

O?Reilly explains that Dublin is keen for uniform, transparent regulation, in part because Irish authorities were embarrassed last year by two separate finite reinsurance accounting scandals involving American International Group Inc. and Australia?s HIH Insurance Ltd. Both also involved Berkshire Hathaway Inc.?s Cologne Re Dublin.

Events such as international accounting scandals and record-breaking catastrophes are hastening regulators? efforts to shed light on the once-informal reinsurance business, but the market faces short-term adjustments. It will be interesting to watch the EU directive?s impact on Bermuda and US reinsurers over the next two years.

But first stop ? Dublin.