Energy insurers are writing business dangerously at a underwriting loss, a top executive has warned. And reinsurers are contributing to the problem with a flood of cheap reinsurance.

In a year of expected underwriting losses for energy insurers, premiums are dropping and claims are rising.

President and CEO of Bermuda-headquartered Zurich Global Energy, Robert Golden, said too much primary capacity is chasing far too few risks in the market, creating pressure on price.

He noted, "The market will turn very fast because in a lot of these layers, prices are below `burning costs'. Gross premiums are less than projected claims.'' Insurers are depending on investment income and cheap reinsurance to over-ride an underwriting loss.

"It is neither good for the clients nor the insurance market, because when the market turns and gets really hard, the clients may walk and not be buyers again,'' he cautioned.

"It's a guaranteed loss to write it. But what we are also seeing is that a lot of these accounts are not getting completed at these very aggressive pricing structures. Brokers are coming back to see if people will consider them at a higher price to complete the order.

"That's an indication that there's been a bottoming out in the price decrease.'' Mr. Golden said a client's view is: "Why rent my corporate capital to pay the claim, when an underwriter would do it for less than what I think is the cost? "If I think I'm going to lose $100 on every claim and the underwriter says he'll price it at $80, do I want to give him the $80 and book the $20 as profit? "In some cases yes, and in some cases that's stupid, because you want to get it arranged so that you don't even have a $100 claim. You bring it down yourself to $80 through risk engineering and safety issues.

"No claim is good, whether you collect from an insurance company or pay it yourself. Good quality operators are looking to better risk management.'' Today, risks are better engineered. Assets are spread over larger areas and there are more technological improvements, providing a better risk profile.

But reinsurers continue to provide ample and inexpensive capacity.

Mr. Golden warned: "Insurance companies, rather than renting their own capital, will borrow through a premium from reinsurers who then take the loss.

"When reinsurers wake up and find out what they've done, they won't stay around. They are effectively subsidising the rate decreases. The primary markets know better what's going on, because they are in the market every day.

Some in the reinsurance market may not.

"There are already all kinds of stories in London about reinsurers having trouble and insurers' volume dropping, because they don't want to write risks on the basis that maybe the reinsurers won't be there.'' Bermuda was a logical marketplace for the establishment of the Zurich Global Energy headquarters two years ago. Mr. Golden spent some years in Bermuda as head of Texaco insurance subsidiary Heddington and saw the increase in traffic volume over the years.

Bermuda continues to attract clients, but he said, "It is facing competition at various levels of client programmes -- the type of competition you have to watch because you can lose your franchise.'' "If you are going to trade in a market,'' he said, "you need to have knowledgeable players. Now obviously, ACE, XL, PartnerRe, OIL, OCIL, plus the clients' captives were writing that same class of business in that market.

"Bermuda provides service to the client and is a knowledgeable underwriting place.'' But to maintain the client base, Bermuda must continue to work hard at client focus and dedication to service. Should those ideals migrate elsewhere, the business will follow and it will be hard to get it back.

He said: "If you look at the earnings of Bermuda companies, everyone is under pressure stock-wise, but the franchises are really good. People see this as a market that has really come of age.

"Centre Re was set up 10 years ago and became extremely successful in blending products involving the traditional underwriting markets with the financial markets.

"That will continue because even in a price sensitive environment like today, there is so much value to the client to be able to quantify a manager's risk over time, versus playing the market.

"The commitment of writing multi-year deals and giving your client a tailored solution is really going to differentiate you from those players who are just providing a commodity.'' Zurich Global Energy employs 75 people writing in 14 offices around the world, including 20 in Bermuda. Half the business being written from Bermuda is US-based, with the next largest being Europe and then South America.

The diversification by line includes liability as the largest portion. Bermuda is known as a liability market. But exploration and production business is also being written here.

The company is also finding accounts from as far away as Australia, business that would normally go to London.