Bermuda is making a push to become a leading centre for catastrophe bonds and other forms of specialist insurance investment by creating a special type of regulatory regime.

Matthew Elderfield, chief executive of the Bermuda Monetary Authority, expects the next wave of capital that enters the insurance sector will come through the capital markets and so has a new supervisory approach for Special Purpose Insurers, was set to be unveiled on Monday.

"Bermuda has always been at the centre of insurance innovation and we would expect to be at the forefront of a new wave of capital," Mr Elderfield said.

SPIs allow investors to make direct investments in insurance risks alongside underwriting companies for limited terms when they believe premium rates are particularly favourable, usually after a large disaster when insurers have the least capital.

Catastrophe, or cat, bonds are used by insurers to offload the risk of very extreme events where their losses would be particularly large.

The other common SPI vehicles are sidecars, which allow insurers to increase the volume of business they write without asking shareholders for more capital.

Hedge funds and private equity groups have been the traditional investors in the area but bankers expect to see increasing interest from institutional investors because the performance of cat bonds held up so well through the financial crisis.

The only bonds that did not perform well were a handful arranged by Lehman Brothers, which was responsible for looking after the money invested in the cat bonds.

When Lehman collapsed, investors were unable to get their money back even though no catastrophe had occurred.

The BMA's new regime is designed to address some of these concerns, which had led to a cessation of new bond issues in the six months following Lehman's demise.

Total annual issuance tumbled from a record $7bn for the 12-month period ending June 30 2007 and $5.8bn in 2007-08 to just $1.7bn in 2008-09, according to a report from Aon Benfield.

Mr Elderfield said the BMA would demand much greater transparency and disclosure from SPIs, particularly around identifying and valuing collateral.

The new rules will apply to any SPI set up in Bermuda, although they can be sponsored by an insurer or reinsurer from anywhere in the world.

Once set up, supervisory attention would focus on the original sponsoring insurer rather than the SPI itself, Mr Elderfield said.

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