The world's first offshore insurance risk exchange is to be established here in Bermuda as a joint venture led by the Bermuda Stock Exchange (BSX), and with the expected participation of key firms in Bermuda's insurance and reinsurance industry.

The BSX has signed an in principle agreement with the Catastrophe Risk Exchange, Inc. (CATEX International) aimed at creating CATEX (Bermuda), the newest insurance risk exchange.

Principals are targeting April for start-up, because a private bill would have to first be considered by the legislature.

BSX chairman Audette Exel said, "CATEX (Bermuda) will be the world's first offshore, electronic exchange permitting members to buy and sell risk, exchange risk and trade risk related index-based derivative products.

"The new exchange will be open to insurance companies, reinsurance companies, insurance brokers and uniquely, traditional capital market players like investment banks and hedge funds -- thus bringing primary risk traders and the traditional capital markets closer together.'' Highly capitalised Bermuda-based insurers and reinsurers are expected to be among the founding members and have a role in the development of the new market.

CEO of the BSX, William Woods, said yesterday, "We want to make sure that the Bermuda market drives it. Securitisation here needs to be driven by the insurance market and not the whizzes of Wall Street. This will be set up with the insurance market, and for the insurance market, and together we will create and deliver derivatives that are relevant to what they do.

Joint venture paves way for world's first offshore insurance risk exchange "Part of the joint venture is that CATEX will deliver an electronic dealing system which they have spent two years developing with the US insurance industry. It is a very powerful product for trading insurance risk, having been especially designed for that purpose.

"Any full member will get dealing terminals. We're open to insurance brokerages, and reinsurers but probably catastrophe reinsurers, and we are also open to the hedge funds.'' CATEX International is a subsidiary of the Catastrophe Risk Exchange, Inc.

which recently opened a risk exchange in New York.

Chairman and president of CATEX International Samuel F. Fortunato said, "CATEX (Bermuda) is a natural extension of our onshore catastrophe risk exchange. CATEX has been successfully launched in New York with ten members.

"It is restricted to New York State licensed insurers or intermediaries and insurers worldwide may subscribe using the services of a New York intermediary.

"CATEX (Bermuda) complements the onshore exchange and will have a wider potential membership as well as a wider product base.'' The US restrictions exclude non-New Yorkers from membership, as opposed to the plans for Bermuda, which can seek a much wider membership.

And as an insurance exchange in New York, the US operation will not be able to introduce securities.

But the planned CATEX (Bermuda), as a result of a less rigid regulatory environment, will be able to introduce securitised insurance products on the same exchange as there is insurance exchange.

Mr. Woods, added, "By leveraging Bermuda's status and expertise as the world's largest specialty insurance and reinsurance market, we can maximise a potentially enormous new market in catastrophe risk reinsurance.

"This new exchange will provide an extremely attractive service for insurance companies, brokers and reinsurers who are already based here and those in other markets.'' Mr. Woods said, "This will create a cash market where the insurance products are traded on an electronic exchange quite openly. There will be publicly available pricing as to what reinsurance premiums are and what catastrophe risk event premium rates are, which is currently sort of mystical information only available to a small group of brokers in the middle.

"Once that information is out publicly, just like stock exchanges worldwide, once the pricing information is disseminated the market really takes off.

"We hope to be able to create an index based on the cash prices. That index will be real-time, reflecting how proper insurance companies are valuing risk on a minute by minute basis. It should be a powerful tool to create derivative products off of.

"The problem so far is that everyone wants the derivatives but nobody has the bench mark indices, the industry standard indexes to work off. Our hope is that if CATEX (Bermuda) really takes off and we get lots of volume, we will actually create that index product.'' The BSX hopes that local insurers and reinsurers becoming CATEX (Bermuda) members will also automatically list on the BSX for a reduced fee.