This week, the insurance industry holds one of its most important annual conferences. The annual Risk and Insurance Management Society (RIMS) conference, being held this year in San Diego, has attracted its usual lion's share of headlines and coverage as 10,000 industry figures and Bermuda's top politicians head to California for the RIMS conference.

At the same time, another, more confidential annual conference is being held here in Bermuda, by the Reinsurance Association of America (RAA).

In Bermuda's insurance-focused international business industry, the acronym RIMS has become pretty well known. The RAA, by contrast, attracts a considerably smaller share of the spotlight.

But some local insurance people who would normally be enjoying the weather in San Diego have decided to stay behind in Bermuda to facilitate the meetings of just 80 to 90 RAA representatives expected to attend the conference.

Why? To answer that question requires an understanding of what the RAA is, and its purpose and goals.

The RAA is a non-profit trade association of United States property and casualty reinsurers. Established in 1968, the association is headquartered in Washington, D.C.

Its annual conference in Bermuda this year is not the first time the association has visited the Island. Established in 1968, the RAA held its inaugural conference here, too.

Despite the importance of reinsurance to the Bermudian economy, the concepts behind reinsurance are probably not as well understood as tourism is. In part, that's because everyone travels, particularly Bermudians, whose tourism off the Island starts with an air flight.

Reinsurance is best thought of as "insurance for insurance companies''.

Insurance companies see reinsurance as a way to protect against unforeseen or extraordinary losses.

Some events, such as an earthquake, would cause too great a loss for any one company to bear. But people who want to buy insurance cannot be expected to buy 20 or 30 policies to provide all the cover they are looking for. So, in its simplest form, insurance works like this: Say the owner of a hotel wants to buy a policy to cover the cost of rebuilding a hotel after an earthquake. Say it would cost $100 million to build a new hotel if the existing one were destroyed in an earthquake. The hotel owner contacts an insurance company, and pays the company a single premium to cover damage up to $100 million to the hotel.

But the insurance company might not want to carry all that risk, since it would prefer to spread its risk among a series of possible events. The company then enters the reinsurance market, and finds, say, three other companies willing to equally share the risk for a share of the premium paid by the hotel owner.

The hotel owner still has just the one policy, and still has $100 million coming in the case of a total loss. But the insurance company the hotel dealt with, in fact, is only on the line for one-quarter of the risk. It has bought reinsurance for the other three-quarters, allowing it to sell a different policy to another customer and still be able to cover all its risks.

In practice, it's not quite as simple as that. The three companies who took on a share of the risk may in turn reinsure their shares of the risk with other reinsurance companies. In this way, although the hotel owner need only contact a single company, he has the strength of many companies behind him, each of whom would be on the line for a small piece of the $100 million loss should the hotel be destroyed.

Reinsurance serves to limit liability on specific risks, and thereby increases the capacity, which is the total amount of coverage an individual insurer can provide. Reinsurance shares the liability when losses would otherwise overwhelm the first (or "primary'') insurance company's assets.

Reinsurance also helps insurance companies to stabilise their businesses. When people look for an insurance company with which to insure their risks, from bike insurance to the catastrophic loss of life and property, they look for a stable company with a long track record.

Consistent earnings is an important measure of a company's stability, but insurance is a world in which premiums are earned year in, year out and losses occur only every now and then.

In the example above, without reinsurance, the company might earn the hotel's insurance premium every year for seven years and if a disaster then struck, be completely wiped out along with the hotel.

Reinsurance brings stability to cyclical market Reinsurance makes it possible for the insurance company to manage the swings and flows of the market place.

In a reinsurance contract, the company selling shares in the insurance pays a premium to each company which accepts a share of the risk, thus sharing out the customer's premium more or less as the coverage is shared out.

Obviously, reinsuring every risk with several companies would require an endless trail of paperwork, so sometimes similar insurance policies are bundled together in groups of the same type, and reinsured as a block.

Reinsurance is a global business. Its international nature reflects a further spreading of risk and access to broader capital markets to help cover losses.

About 40 percent of all US reinsurance premiums are paid to (or "written by'') non-American companies. Bermuda is a leading market for that business.

Two-thirds of all property catastrophe reinsurance premiums are written by non-American companies. In the "prop cat'' business, the industry nickname for property catastrophe reinsurance, Bermuda is the leader.

The RAA is a trade association. Its website (www.reinsurance.org) says "the primary purpose of the RAA is to advance the interests of the US property and casualty reinsurance industry through effective government relations with state and Federal regulatory agencies, legislators and other elected and appointed officials, and representation before judicial bodies''.

In addition, the RAA "aims to build understanding of reinsurance regulatory issues and the reinsurance business among the media and other external audiences, and to service the needs of its members by providing information and assistance.'' The RAA is an organisation paid for by its members to look out for their interests. Reinsurers know reinsurance; trade association professionals know how to deal with governments and media to present the case for reinsurance.

Bermuda insurers have a comparable organisation, the Bermuda Insurance Institute, which performs many functions similar to those of the RAA and places a great stress on education for Bermudians to help them enter the local insurance industry.

RAA members, as the listing on Page 17 shows, are mostly very large companies with widespread interests, as are the Bermuda companies. In the world of insurance, all companies compete if they offer the same type of coverage, but it is in the nature of reinsurance that many of these companies are partners with each other in significant reinsurance transactions.

RAA members are all experienced and well-established US providers of property and casualty insurance. To become a member of RAA, a corporation must: Be engaged in coverage of risk of property-casualty reinsurance and retain a substantial amount of risk, i.e. be actively involved in the reinsurance business; Operate as a licenced, authorised or accredited reinsurer in at least 25 States: and Have capital and surplus of at least $100 million.

Capital and surplus is, in essence, a measurement of the store of wealth the company has available to meet possible claims on insurance business it has written. Bermuda's insurance industry has capital and surplus in excess of $30 billion.

Capital and surplus, which is revealed to the public quarterly, can be precisely measured, since it is exactly represented by assets with a known value.

Claims, however, are notoriously difficult to measure at any given moment in certain types (or "lines'') of insurance.

For example, the companies who insured asbestos manufacturers estimated potential claims as very small before the dangers were known. The resulting claims ran into billions of dollars.

It is thanks to reinsurance that the asbestos problem only dented the insurance world. Without reinsurance, any company which had covered asbestos damage entirely at its own risk would have been forced out of business, with potential claims unmet.

CATASTROPHE -- Reinsurers -- in Bermuda and the US -- insure insurance companies for damage caused by "risks'' such as hurricanes (above), enabling "primary'' insurers to survive single storms like Hurricane Opal (above).