Bermuda's straining infrastructure may be the major threat to the future growth prospects of the Island's insurance market, according to a top executive.

XL Re chief executive officer Greg Hendrick told the audience at the Insurance Day Summit this week that the Island's physical limitations were starting to creak.

"We have stretched the resources of the Island," Mr. Hendrick said. "We help in terms of education and in the way we support our Bermudian staff.

"There is a point at which we will get stretched beyond breaking point, although we're not there yet. How much more can the Island take?"

Many of the 10,000 or so foreign workers on the Island work in the insurance industry. The influx has contributed to the pressure on schools, housing and the roads.

In a panel discussion on what the future holds for the Bermuda market after two years of low catastrophe losses, Axis Capital chairman Michael Butt said disciplined underwriting was the key to the Bermuda market survival, although he believed the economic turmoil caused by the credit crisis was a significant threat, as was inflation.

With lower-than-normal catastrophe losses over the last two years, the Island's insurers are flush for capital. Competition is growing and rates across most lines of business are declining — a softening market.

Mr. Butt said the Bermuda insurance market has accumulated some $150 billion of surplus capital during the past two years.

"It will take more than the odd storm or low investment returns to get through that," Mr. Butt said.

He added that the Island was well equipped to deal with soft market conditions. "Bermuda probably is one of the best centres of underwriting skills in the world, because our companies are run as underwriting companies and not as investment trusts that do some underwriting.

"The signs are that people are showing more discipline than they might have done in the past. The percentage of naive capital seems to be reducing."

He added that he would like to see a better understanding of the insurance market from shareholders, because "caution in a down-market should be rewarded, not punished".

Many industry figures had expected to see a surge in mergers and acquisitions (M&A) activity during the soft market, with some Bermuda companies expected to merge with others.

However, that's not how it has turned out so far. Most of the acquisition activity thus far has seen companies like Validus and Argo buying into Lloyd's of London, and other Bermuda companies buying US operations in the interests of diversification and expanding their reach.

"I don't think many people expected to see Bermuda buying into London," Mr. Hendrick said.

"You might expect to see Europe buying into the US, with the dollar so weak, and brokers buying brokers, as well as underwriters buying managing general agencies. It's all about finding ways to get to more business.

"But we haven't seen Bermuda buying Bermuda. I'm doubtful that it will happen, because I don't see the impetus for it."

Mr. Butt said M&A activity between Bermuda companies had become less likely than in past years, because the companies were now so similar to each other.

"The value issue is going to stop mergers. Until there is a better understanding of why companies are trading below book value, there's going to be no deals," Mr. Butt added.