Standard's & Poor's (S&P) rating service has beefed up its reporting on the Bermuda insurance market in response to increasing overseas interest in companies here.

S&P's new Bermuda Market Report outlines the effort of reinsurers and insurers based on the Island to shake off the stigma of being considered second class.

Not all potential clients fully trust and accept Bermuda-based companies, S&P states.

"In many cases, Bermuda companies are used as a last resort, and because the client cannot obtain enough (in some cases any) insurance from more conventional markets,'' S&P states. "Further, Bermuda companies continue to suffer a stigma in the world's regulatory community, partially due to inaccurate perceptions of lax supervision, and partially due to the historic rules of secrecy.'' The reality is companies here have flourished through spearheading innovation, making them an integral to the world's insurance and reinsurance markets.

"It is one of the few places in the world where large and unusual risks can be underwritten and it certainly is the home of some of the more creative minds in the insurance and reinsurance industry,'' S&P declares. "And as it continues to innovate, Bermuda is likely to retain its competitive advantage.

Standard & Poor's expects, therefore, that the evolution of the last 30 years will continue in the future and ever more creative and innovative insurance mechanisms will be tried first in Bermuda and then exported to the four corners of the globe.'' S&P says the risks of this success lies in the efforts of some companies to diversify away from their main lines of business, to sectors where they may not have much expertise.

"Further, we have also warned that the long term intentions of the owners of these companies will significantly affect their ultimate success,'' S&P states. "To a large extent, many of the investors are insurance-savvy and can be expected to be patient capital, nevertheless, it still remains to be seen if and how all the equity holders will behave over the longer term, especially if and when significant losses are reported.'' S&P predicts that in the area of property catastrophe reinsurance, Bermuda's companies will be under pressure to prudently manage their risks and expansion into other lines of business.

Rates in this area could continue to fall ten to 20 percent during this year in the absence of a major catastrophic event. To counter the declining rates, the reinsurers have been expanding their activities, either through acquisitions or by developing new lines of business.

S&P believes further mergers in the industry could make CAT Ltd., International Property Catastrophe Reinsurance Co. Ltd., LaSalle Re, and RenaissanceRe targets for takeovers by some of the larger players.

S&P also predicts the Bermuda companies will be the first to tackle the successful integration of finite reinsurance contracts with financial products or services, a hot topic under debate in the industry.

Companies use finance reinsurance to protect balance sheets from risk obligations. The combination with financial products or services would seek to extend protection to such risks as currency, equity and bond market fluctuations. Companies such as Centre Reinsurance Co. (Bermuda) Ltd. are forging the way forward in this area.

The high excess liablity carriers such as ACE Ltd. and EXEL Ltd. will also remain in demand, S&P believes.

"As multinational companies, in particular, develop a comprehensive composite of their risk profile, Bermuda's companies specialising in high excess risks will play an important role in meeting tomorrow's demands,'' S&P states.

As the largest domicile for both single parent captives and group or association type captives, Bermuda can expect further growth in the sector.

More and more companies are seeking to set one up as the trend spreads to Europe and elsewhere.

The S&P report and ratings is used by potential clients as a means of deciding whether those insurers and reinsurers will be able to fund the coverage in the event the company has to pay on a policy. If the rating is good, insurers and reinsurers use it as a marketing tool to attract clients.