Many eyes will be on the Bermuda reinsurers come July 1, 2002. Many are saying the full impact of the new capacity in the reinsurance industry won't be felt until then, a significant renewal period for many of the large Fortune 500 companies.

Large premium volumes will be traded on this renewal date. It will also mark the separation of the real players in the insurance industry from the others.

The new capacity hit the market too late to capitalise on the January 1, 2002 renewal period because many of them did not have the adequate infrastructure in place to meet the demand from prospective clients. The next big date is July 1, 2002. Are they ready now?

A.M Best recently ran a story about the coming of July 1 renewals based on comments made by several major brokers at the 2002 Broker Investor Conference held in NY. Of note to the Bermuda insurance industry were the comments by Roderick P. Thaler, executive vice president and national director of Willis Re.

Thaler said: "A lot of the major programmess in the World Trade Center did not renew on January 1, and they're coming in on July 1."

As for the world's reinsurance markets, Thaler noted that Bermuda has become more active with the launching of nine start-ups since September 11.

"With the new capital, it's only a matter of time until Bermuda takes a leading role, and leaders tend to get the better signings," he said. "The key is going to be their ability to use capital at April 1 and the other renewal dates.

"The question also remains just how much of the announced capacity in Bermuda was actually used by year's end. Bermuda's capacity is $350 million to $500 million, whereas the capacity of the London market is half that."

Bermuda has a big plate to fill in the eyes of the world market. I just hope the new players have the adequate infrastructure to deal with the huge demand that will be coming their way.

I hope they will remember that because of the vast capacity which Bermuda now holds, more than London at the moment, the players will underwrite and price risks sensibly so that the industry does not go into a tail spin well before it is ready to do so.

Or, that the industry loses many of the larger clients to self-insurance because of perceived price gouging. There is a thin line that needs to be carefully walked at the moment.

Overpricing is not good for clients. Underpricing is not good for the industry in the long run. Is it possible to find the balance? If Bermuda is to get the best signings as Thaler predicts because of the capacity it now has, the new reinsurers need to be cognizant of the incumbent reinsurers and not try to steal too much of their business away by undercutting the premiums they will have to charge.

The incumbent carriers must be careful not to overprice themselves to make up for thirteen years of a soft market either.

The Bermuda market must act as a cohesive market and not as major competitors of each other. Of course, all insurance companies have to resist colluding with each other.

However, underwriters can obtain information about the market in other ways. There are already signs in the industry of client defections to their own solutions because of escalating prices and numerous exclusions at their policy renewals.

A recent example was the announcement by Oil Insurance Ltd., and Oil Casualty Insurance Ltd. that 12 of its member companies were forming an excess property and business interruptions mutual insurer called sEnergy Insurance Ltd. sEnergy will provide a $200 million limit for property risks excess of $250million and business interruption risks excess of $50million.

Why? Because one of the hardest hit classes of business since September 11, 2001 has been the Energy side from a pricing standpoint because of their worldwide operations and high risk exposures, ie refineries that can cause lots of damage if a terrorist chose to use them as targets.

Jack Wesley, president and chief operating officer of OIL, OCIL and sEnergy explained why sEnergy was formed as follows: "The members came to us and said that the alternative markets were no longer providing consistent or rational coverage."

It is the reinsurance companies that will dictate future rates for the direct insurers because many of the direct insurers would not be able to offer the capacity or coverages that they can without the assistance of their reinsurers.

The Bermuda reinsurance industry is now number two behind the United States and ahead of London and therefore has become a major player in a very short period of time.

The reinsurers must be careful not to price the direct insurers too high, impose draconian exclusions or hold up the renewal process too much because whatever they do gets passed on to the direct insurers who in turn have to pass the changes on to the buyers.

If the buyers perceive, as they did with the energy companies, that the markets are no longer providing "consistent or rational coverage" then the whole industry will suffer.

The insurance industry finds itself in quite a quandary right now because it's the largest clients with the most hazardous exposures that provide the bulk of the industry's premiums.

It's also these guys that have the most money and savvy to go off on their own and develop self-funding programmes. The reinsurance industry, particularly in Bermuda, which is wielding a large pen in this year's renewal process, has to be careful to make sure it is sending out a sound message.

July 1 is in my opinion the point of fulcrum for the Bermuda insurance industry. Is it possible to achieve a workable balance?

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in the Royal Gazette every Monday. Feedback crduffycwbda.bm.