(BCOE) to turn insurance risk into a tradable investment.

So why isn't everybody rushing to use the electronic exchange to commoditise catastrophe risk? BCOE president Thomas Heise said while the ideal conditions were in place for trading risk -- low premium in the catastrophe market, and a low interest environment -- other factors were keeping insurers and reinsurers from putting large contracts out on the market.

In the last few months companies have put out six large trades of between $2.5 to $5 million each but this is still considered a small volume.

"This is a fraction of our objective,'' Mr. Heise told members of the Institute of Chartered Accountants of Bermuda at a luncheon yesterday.

One factor was the inability so far to properly measure earthquake damage. The BCOE, through the Guy Carpenter Catastrophe Index, was only dealing in wind related and hurricane risk for the US.

Guy Carpenter was able to create the index through estimates of damage for regions based on submissions from 20 insurance companies. The submissions are calculated geographically by US zip code.

However Mr. Heise said earthquake damage is more difficult to measure because of the nature in which fault lines travel across geographic areas, making it hard to get a proper sampling of the catastrophe.

As the BCOE only dealt with wind related risk, and insurers and reinsurers carried hurricane and earthquake risk, many were reluctant to give up the premium and keep the earthquake risk.

Mr. Heise said one of the tasks facing the BCOE in the coming year was to attract insurers carrying only wind related risks. Another task was to find a way to properly estimate earthquake damage and create an index for tradable options.

"We are figuring out a way to develop an all risk contract,'' he said.

Another factor holding back the success of the BCOE has been the decision by insurers and reinsurers to go for mergers rather than hold back from a poor premium market.

He would have expected the insurers to get out of a low premium market by shifting the risk off to investors in the form of options contracts.

Yet insurers, driven by the need to please Wall Street, have decided to expand into higher paying premium business by merging with other companies.

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