A new insurance industry report predicts increased hurricane activity in the Atlantic this year, and powerful new moves by Bermuda insurers to tap into the US market.

The report by Sedgwick, Inc. has declared that the global insurance industry may have changed permanently.

This year's version of Insurance Market Trends and Developments, a report produced annually, was just released reflecting market speculation that as a result of the large amount of capacity in the market, the underwriting cycle will be flat for the long term future.

Meanwhile, the pricing structure remains "impacted by carriers' market share, consolidation in all segments of the industry, loss experience and other factors.'' Mergers and acquisitions among mid-sized companies in particular are increasing, driven by the need to maintain or increase their market share.

The desire to increase global presence is also a factor driving industry considerations. Examples include ACE Ltd.'s acquisition of Westchester Specialty and PartnerRe's acquisition of French reinsurer SAFR.

There's also more "partnering'' in the industry and insurer insolvencies are on the rise with the number under state supervision or in liquidation jumping from 18 to 38 year over year to 1997.

The report predicts worse catastrophes in 1998 after a 1997 with the lowest level of catastrophe losses in eight years. And it said with the "cooling of El Nino there will probably be a very busy hurricane season in the Gulf and along the Florida coast. Until the summer, El Nino will continue to influence the wet weather in California, Arizona and the midwestern states.'' The report's authors expect more alliances between insurers and other financial services sectors, in the quest for market share. Brokers and agents may also team up with financial institutions to expand their prospect lists and to bring value-added services to their clients.

Mergers and acquisitions will be driven by mid-size companies, striving to strengthen their market position; the need to expand globally; opportunistic purchasers looking to advance their position in product or in services; diversification as a hedge against market volatility; the desire to acquire technology, or to add or replace their own; and, the acquisition of new markets or new distribution channels.

There will be more interest in alternative risk transfer (ART) including rent-a-captives.

The report said that the Bermuda casualty market response to the persistent soft market has been the introduction of new products, establishments of new facilities and expansion of territories and distribution channels in the first quarter of 1998.

It said, "The common denominator in all these activities is to grow from alternative innovative solutions, which appeal to traditional Bermuda clients and potential clients elsewhere.

"Gaining access to the US market seems to be the shared goal of major players in the Island. The US market offers many opportunities due to its larger size and diversification for Bermuda firms to sell their existing products as well as develop new products catered to US buyers.

"The current acquisitions suggest that the middle market, which has not traditionally been a Bermuda customer will be the primary focus as a target market.'' The report discusses that for Bermuda-based ACE Ltd., their new US platform ACE USA opens new distribution opportunities and an expanded presence in US markets.

Sedgwick sees ACE's acquisition of CAT Ltd., after buying Tempest Re, as a conscious step toward expanding its `cat' business. CAT Ltd is a leader in non-traditional catastrophe lines of business and will complement Tempest's expertise in more traditional lines.

And the acquisition of Folksamerica by XL Insurance Co. Ltd. to form XL America marked XL's formal entry into the US market. XL America will operate as an admitted carrier from its office in New York City.

In response to market demand, XL has developed the ability to participate in quota share property insurance with $100 million capacity.

Their primary target is top quality accounts with deductibles and premiums commensurate with occupancy exposure and loss experience.

Sedgwick notes that XL added another innovative product to their portfolio, "Degree Day Forward'', a "weather-related earnings per share'' insurance product designed specifically for gas and electric utility firms, and which provides protection against lower than anticipated revenues caused by unusual temperature patterns.

The report anticipates that Transform, a utility underwriting facility formed last year by XL, ACE and Swiss Re, will be operational by mid-month.

Transform offers property insurance capacity for public electric utilities globally. It can write up to $570 million all risk property and has a capacity of $25 million for transmission and distribution exposures, with multi-year contracts available.

Two new insurance facilities formed by Chubb Atlantic and ACE to write reinsurance predominantly to captives will offer alternatives to Sphere Drake (now renamed Odyssey Rie), which historically focused on captive reinsurance in Bermuda.

Chubb Atlantic's new subsidiary, Chubb Atlantic Reinsurance Specialists Ltd., will provide access to excess of loss, quota share, aggregate stop loss and fronting reinsurance.

ACE's target will be captive-type entities with a predominantly casualty portfolio, on single and multi-line bases.

The report also notes that AIG's purchase of the remaining interest in Starr Excess that it didn't already own, better positions Starr Excess to participate in the US market, while allowing it to have access to the full range of AIG's global resources.

BUSINESS BUC