Insurers are countering the impact of capital market volatility on their investment portfolios, by more activity on The Bermuda Commodities Exchange, president Thomas Heise has said.

The exchange provides a market for hedging and investing in catastrophe risk.

Certain investors are looking more to insurance risks to add to their investment portfolios.

Mr. Heise observed, "The activity has become real. Our objectives are very large, so the activity in respect to that is still very small. But relative to what is going on in the market in general, it is very large.'' Property insurers and catastrophe reinsurers are showing significant interest in the face of plummeting equity prices and a widening of bond spreads.

Insurers use investment portfolios to fund future reserves and pay claims, so any impact against investment yields requires review, and possible reduction, of liability portfolios.

"Some of our last trades,'' said Mr. Heise, "are by far some of the biggest that have ever occurred on any exchange. So it is real. But our objectives are so large that relative to what our goals are, the trades have not been that large yet, to be brutally honest.

"Our membership includes some very large institutions in Bermuda and overseas and they will shun unnecessary publicity until success truly happens. "We are not there yet, but the activity has come to the point where US regulators do want to figure out how to deal with it, because it will become reality for them very soon.'' For that reason, Mr. Heise was invited to the National Association of Insurance Commissioners (NAIC) quarterly meeting last month in New York to speak to state regulators during a symposium entitled Capital Market Alternatives for Catastrophe Risk.

He advised that now that such an exchange has become a reality in Bermuda, it could also be developed in the US and in other jurisdictions.

He said the NAIC was looking at the new market carefully, because for accounting purposes, insurance companies will sometimes need to have this type of investment treated as reinsurance, and in other instances purely as an investment.

Said Mr. Heise, "That is very difficult for people who have been just dealing with insurance products all their lives. They have to get their arms around the fact that this product can act in a variety of ways.

"But it is not really any thing different from what these reinsurers do right now. They already invest in securities and derivatives and they write reinsurance or insurance contracts.

"Every insurance or reinsurance contract is essentially an option contract, and when it is looked at that simply, it is just a matter of adapting whatever regulatory scheme you are using.'' Bermuda took the lead in allowing cat bonds to be based here, developing a specialty business environment, with strong regulation and laws, that can quickly adapt to industry developments.

Mr. Heise noted that savvy investors know that the brains behind insurance companies have been successful at making money off of insurance risks for many years.

"They are not companies that are right now going belly-up at any noticeable rate,'' he said. "What we're doing at the exchange, and what others are doing in cat bonds, is allowing investors for the first time to directly participate in insurance risk.

"Adding those contracts to their investment portfolios, does have tremendous advantages. The upheaval in the equity markets and the foreign bond markets is certainly focusing people who weren't already looking.'' BUSINESS BUC