A Bermuda insurance company has entered US capital markets to hedge the risk for crop insurance.

Stockton Reinsurance Ltd., set up in Bermuda by Commodities Corporation last year, is using the futures and options capital markets experience of its parent to effect "a more predictable loss''.

The move by Stockton, formed in part by former employees of financial reinsurer Centre Re, comes months after the company started proving financial guarantys to owners of tankers operating in the US.

Stockton recently set up a reinsurance contract with two insurers who act as consolidators for US farmers buying hail and multi-perils crop damage insurance policies.

Stockton combines hail and multi-peril risks in their reinsurance contract with the consolidators.

Blending the two components results in a "more predictable loss'', said Stockton president and CEO Mr. Thomas Dailey.

Farmers buying crop insurance is not a new idea nor is it new for insurers to buy reinsurance for this risk.

Blending hail and multi-peril in the reinsurance contract is not new either.

So where is the innovation? Stockton is using the futures and options capital markets' experience of Commodities Corp. to hedge the risk.

"We are starting from the capital markets side and working back to insurance,'' said Mr. Dailey.

"This is a more effective means of providing crop reinsurance to the traditional market,'' he said.

"Bringing the insurance industry and the financial industry together will bring effectiveness and greater efficiency to the market,'' said Mr. Dailey.

Mr. Dailey said he believes reinsurers may be the mechanism for risk to flow from insurers to the capital markets.

"The goal is a more efficient risk transfer,'' he said.

Many insurance industry experts have said insurers must access the multi-trillion dollar capital markets if they are going to provide enough coverage to the market.

Rather than the insurer going to the capital markets to hedge risk, the reinsurer is using its existing capital markets experience to hedge it, in this case it is for crop damage.

Commodities Corp., a global asset manager with over 25 years experience on 60 stock exchanges around the world, is well-positioned to bring asset management to its insurance operation.

Commodities Corp., an active trader in agricultural derivatives for many years, provided 40 years of investment data in connection with the reinsurance contract said Stockton.

Stockton will see how the first contract worked early next year but it will take five years of underwriting for a more solid picture to emerge.

"If we can further define the hedge we will be a much bigger player,'' said Mr. Dailey.

The reinsurance contract covers the March-December growing season. Stockton's new contract covers 35 states and 70 different crops with 75 percent of the exposure related to three primary crops; wheat, corn and soybean.

"This is designed to be profitable and mitigate the tails, but there is risk for Stockton,'' said Mr. Dailey.

In many other jurisdictions, this type of innovative product would not be possible, he added.

Bermuda supports innovation and has a favourable regulatory environment, he noted.

"We will be conservative as we build our underwriting book. We also believe in understanding the maximum loss,'' said Stockton director and vice president Mr. Richard Black, who came to the reinsurer from Centre Re.

Stockton officially announced its entry into the insurance and reinsurance business in Bermuda in October of last year and in November announced it would respond to the US Coast Guard's certificates of financial responsibility requirements through First Line, developed by New York-based insurance brokers Johnson and Higgins and underwritten by Stockton.

reinsurers to access the world's capital markets.