(of The Wall Street Journal)<$t$>Even as London grows as a world financial hub, this sunny island in the Atlantic is forcing Britain to fight harder to defend one of its mainstay industries: reinsurance.

London is home to the 318-year-old Lloyd’s insurance market, where insurers often turn for insurance of their own to spread out the risk they take when doling out coverage for events like natural disasters or airplane crashes.

Bermuda has been attracting interest from major reinsurers since at least the early 1980s with low taxes and lighter regulation, and it is now enjoying a boom. Within the past year or so, two major British insurers and Lloyd’s mainstays, Hiscox PLC and Omega Underwriting PLC, announced plans to move their headquarters to the island. Another, Amlin PLC, set up a Bermuda subsidiary. And last week Brit Insurance Holdings, a London-based insurer and reinsurer, said it would be the lead investor behind Norton Re, a new Bermuda-based reinsurer focused on catastrophe coverage.

Natural disasters have boosted demand for the catastrophe reinsurance that is Bermuda’s specialty. Roughly 40 percent of the reinsurance for US natural disasters is sold by Bermuda-based firms, according to the Bermuda Monetary Authority. Since Hurricane Katrina last year, several more reinsurers opened doors on the island, thanks in part to the high premiums they can command for catastrophe coverage. Overall, according to the authority, Bermuda’s gross insurance premiums written roughly doubled to $95.3 billion between 2001 and 2004, the latest year for which figures have been released. With the rush of capital that has come to the island in the past two years, the number now seems likely to have topped $100 billion.

The situation is a twist on London’s assertion of itself as a global financial hub. Hedge-fund growth in the city is booming. And so far this year 269 companies have gone public on London exchanges, raising more than $54 billion, beating New York’s 194 offerings, which have raised $44.5 billion.

Many of Bermuda’s biggest insurers are crammed into several blocks of picturesque Hamilton, where some occupy prime waterfront real estate near the swank jewelry and clothing shops on Front Street.

“You cannot afford to ignore something that could make you uncompetitive,” says Robert Childs, chief executive of Hiscox Bermuda, referring to Bermuda’s lower tax rate. Bermuda has no corporate income tax. The corporate tax is 30 percent in Great Britain.

Lloyd’s began as a meeting place for sailors and ship owners in a British coffee house in 1688. It is not a company. It is essentially a marketplace that brings together insurers; brokers flood into its building, shopping risks among more than 60 insurers or syndicates in the market.

It is widely regarded as the greatest concentration of underwriting acumen in the world. But it is often criticised for having backward, paper-based administrative procedures that make doing business slow and expensive. Robert Hiscox, the chairman of Hiscox, wrote in the company’s 2005 annual report that if Lloyd’s doesn’t simplify its procedures, it “will wither away”.

The people running Lloyd’s aren’t taking the threat lightly. In a speech last month, Lloyd’s CEO Richard Ward acknowledged that some four tons of paper goes from Lloyd’s to its out-of-town claims processing centre daily. In response, the market is in the midst of a three-year plan designed to modernise its administrative procedures.

Lloyd’s executives also have tried to remove some nagging uncertainties from the market, including obligations to cover potentially costly asbestos claims. In October, Lloyd’s arranged to transfer asbestos and some other claims to Warren Buffett’s Berkshire Hathaway Inc. holding company. Berkshire took on as much as $7 billion in claims from Equitas — a reinsurer set up by Lloyd’s to handle the growing asbestos burden — in exchange for payments from Lloyd’s and control of reserves backing the claims.

The credit-ratings unit of researcher Standard & Poor’s increased the outlook on Lloyd’s financial strength to “positive” after the deal, which could be a precursor to a ratings upgrade. That, in turn, could benefit Lloyd’s insurers, because higher-rated entities tend to see more business and thus can be choosier about which risks to assume.

Lloyd’s underwriters generally cover a far more diverse range of risks than do those in Bermuda. Lloyd’s reinsurers are also backed by a roughly $3.7 billion central fund. Some analysts say the diversity and the central fund give Lloyd’s a long-term advantage over Bermuda, because Lloyd’s reinsurers don’t need to keep as much cash in the bank for potential disasters. The money can instead be invested or used to underwrite additional business.

“Lloyd’s incumbents can potentially make better returns than the tax-advantaged Bermudians,” Morgan Stanley analyst David Collins wrote in a June note.

Meantime, Lloyd’s is hoping to benefit from Bermuda’s booming growth, by attracting capital back from the island. Lloyd’s officials note that insurers who have established Bermuda units have increased the amount of business they write back in the Lloyd’s market. Bermuda-based Catlin Group Ltd., which already had a Lloyd’s syndicate, last month bought fellow Lloyd’s insurer Wellington Underwriting PLC for $591 million. Hiscox, Omega and Amlin also sell at Lloyd’s.

“You have to accept that Bermuda is a small island,” says Rolf Tolle, the franchise performance director at Lloyd’s. “If you want to write a large, diversified book, you need a lot of people <\m> underwriting and claims people. The island is just not big enough to support that.”

Island inspires Lloyd’s