The sub-prime mortgage crisis could open up opportunities for the Bermuda insurance market in the same way that major hurricanes have done in the past.

That is the view of Matthew Elderfield, chief executive officer of financial regulator the Bermuda Monetary Authority, who said the Island could fill a gap in capacity for the financial guaranty industry.

Already, one entity has applied to the BMA to set up in Bermuda to provide such capacity, and it is intending to go public within weeks.

A wave of new property and casualty insurers and reinsurers set up in the aftermath of Hurricane Andrew in 1992 and following the terrorist attacks on New York and Washington in September 2001. The same thing happened after the devastating hurricane season of 2005, when hurricanes Katrina, Rita and Wilma (KRW) battered the US and caused more than $65 billion in insured losses.

Billions of dollars of capacity poured into Bermuda as new companies and risk-sharing entities such as "sidecars" were established on the Island. Now the BMA is preparing itself for a possible further wave of new incorporations.

"Sub-prime is the KRW of the financial guaranty business and our response is first, to sort through the damage and second, to ensure that new capacity comes on line quickly, but subject to careful oversight," Mr. Elderfield said yesterday.

The financial guaranty business has been badly hit by the ripples emanating from a wave of mortgage delinquencies sweeping the US in recent months against the backdrop of a slump in property values.

Financial guarantors, otherwise known as bond insurers or monolines, have been exposed to the crisis because they have guaranteed structured investment vehicles (SIVs) and collateralised debt obligations (CDOs), whose assets include mortgage debt.

The defaults on risky mortgages have caused write-downs in the value of these assets and claims against the bond insurers' guaranties. The guarantors' share prices have plunged and some, including Bermuda-based Security Capital Assurance (SCA), have been downgraded and lost their all-important AAA credit ratings.

Ratings agencies have demanded that bond insurers find extra capital to make sure they have sufficient claims-paying resources to meet their obligations.

Investment guru Warren Buffett has seen opportunities in the struggling bond insurance market, creating an arm of his Berkshire Hathaway company to capitalise on what he sees as a business opportunity.

As the regulator, the BMA has been monitoring how the sub-prime crisis has affected the Bermuda market. The Authority has gathered data from companies and then run "stress tests" to gauge how seriously their exposure to the crisis might affect them.

The BMA has found that the Island's insurers are, in general terms, not seriously exposed in their investment portfolios. Those writing directors' and officers' (D&O) insurance and errors and omissions (E&O) insurance have potential future exposure, as shareholders launch class-action lawsuits against the management of companies whose share prices have plunged during the crisis. How much such claims will cost Bermuda insurers remains a matter of speculation.

But the BMA's most serious area of concern right now is the financial guaranty sector. These companies rely heavily on their AAA credit ratings to write new business. Some, such as Security Capital Assurance, have already lost their top-notch ratings, while others, like Ram Holdings, are under review for possible downgrade.

The BMA has been discussing possible courses of action with affected Bermuda guarantors, ranging from going into run-off — writing no new business — to finding ways of boosting their claims-paying resources.

New York superintendent Eric Dinallo has put forward a "good book, bad book" plan that would allow bond insurers to split themselves up, separating their "safe" municipal bond business from their riskier structured finance lines. This is another development the BMA has been in discussion about with Bermuda-based monolines.

Conscious of the global reach of many of the Island's companies, the BMA has also briefed regulators overseas on how the Bermuda market is faring in the crisis.