reinsurance and financial services companies -- many of them Bermuda-based -- to its membership.

The BCOE, located at the American International Group building on Richmond Rd., will launch a new way to hedge and invest in catastrophe insurance risk using options contracts on November 12. The exchange hopes to provide at least $500 million of additional insurance capacity for the US east coast region.

While $500 million in trading is the break even mark for the fledgling exchange, BCOE president Thomas Heise expressed hope that the volume could eventually rise to "tens of billions of dollars'' in the market.

If the concept works the exchange could eventually help boost Bermuda's position in the reinsurance market. About one-third of catastrophic cover risk is already being underwritten by companies based on the Island.

The exchange has attracted the foundation for providing such capacity. The exchange's membership includes Bermuda-based companies AIG Insurance Commodities Trading Ltd., Aon Re (Bermuda) Ltd., CAT Ltd., General Re Underwriting Services Ltd. (a subsidiary of US-based General Re), International Property Catastrophe Reinsurance Co. Ltd., Mid Ocean Reinsurance Co., Ltd., Partner Reinsurance Co. Ltd., Renaissance Reinsurance Ltd., Stockton Reinsurance Investments Ltd., and Tempest Reinsurance Co. Ltd., which is being purchased by ACE Ltd.

Bankers Trust International, Chase Manhattan International Finance Ltd., Clement S. Dwyer Jr. & Aaron B. Stern, E.W. Blanch Holdings, Inc., Goldman Sachs International, Griffin Trading Co., Guy Carpenter Advisors, Inc., Morgan Stanley & Co. Inc., Sedgwick Lane Financial LLC, and Tranatlantic Holdings, Inc. are also members.

They will be able to conduct trading in option contracts based on an index of insured homeowner losses due to atmospheric perils in regions of the US over specified periods.

They will conduct trades using a secure electronic computerised system which allows them to post prices and volumes anonymously.

Options are a specialised type of investment instrument usually used for betting on what will happen to the price of a certain commodities in the future. Here the commodity will be insurance risk, and the determining factor will be the amount of losses due to catastrophes which occur in the US during a certain period.

The options being created will allow reinsurers to hedge off some of the risks they assume to investors outside the industry, giving the companies the ability to cover more business. For investors, the contracts will allow them to directly purchase catastrophe risk as a new form of investment. They will be betting against catastrophes occurring.

"Investors have proven they will buy risk,'' Mr. Heise said.

The contracts will be based on the performance of an index created by IndexCo., an affiliate of Guy Carpenter & Co. Ltd.