Reinsurance has been described simply as insuring insurers.

More colourful descriptions include, "insurers taking in each others' dirty washing'' and "insurance between consenting adults''.

My favourite is Mr. Justice Park's (an 18th century English judge) who described "re-assurance'' as "a contract which the first insurer enters into, in order to relieve himself from those risks which he has incautiously undertaken, by throwing them upon other underwriters, who are called re-assurers''.

Reinsurance was regarded as a form of gambling and was illegal in England from 1745 until 1864. This is perhaps one reason why it took a long time for an offshore reinsurance industry to develop in Bermuda.

Another reason is that it was not until the 1970s that developments in the United States of America gave rise to the chain of events whose most visible sign today is a series of new buildings along Pitts Bay Road and on the site of the former Bermudiana Hotel.

The American courts removed two obstacles that had restrained the activities of the plaintiffs' bar: lawyers in the United States were permitted to advertise and to charge contingency fees. A litigation explosion was inevitable.

Ironically, a substance associated with retarding fires was the spark that set it off.

In the 1980s, insurers in the United States were faced with a multitude of claims arising from the effects of exposure to asbestos.

The American courts invented a doctrine under which the insured could recover from any insurer on risk at any stage from the victim's first exposure through to the actual manifestation of asbestosis, with any one insurer potentially facing total liability for the loss.

Not to be outdone, Congress passed environmental protection legislation designed to promote insurance coverage litigation on a gigantic scale. The American courts dutifully twisted policy language to provide coverage for perils that were excluded.

Between 1989 and 1992, Lloyd's suffered losses amounting to 14.2 billion (approximately $23 billion). Not all of this can be blamed on the American legal system. Some of the losses, resulting from various disasters, were magnified by the incestuous way in which excess of loss reinsurance was place (the LMX spiral).

New capital flowed into Bermuda (already the leading centre for "captive'' insurance companies) at the end of the 1980s (when ACE and XL were created), and in the 1990s the "big cats'' were born.

Investors saw the strategic advantages of a tax-benign jurisdiction, politically stable, and with a rational legal and regulatory system, just 90 minutes by air from New York.

Bermuda has also become a crossroads for the reinsurance and capital markets.

The requirements of "alternative risk transfer'' (although not as trendy as "e-commerce'') have given rise to new kinds of transactions and new legislation to accommodate the needs of the market.

The Bermuda reinsurance market has been transformed in the ten years I have lived on the Island. The new players in the market and the increasing number of transactions have given rise to more disputes.

In the late 1980s, Bermuda was best known by international reinsurance lawyers for its insolvencies, of which Mentor was the largest and most litigious.

In the 1990s, the insolvency of a local company, Bermuda Fire & Marine, which dabbled (disastrously) in the international reinsurance market through the H.S. Weavers underwriting agency, resulted in high profile litigation.

Reinsurance and the law Cases like these, however, which make the headlines, are not typical of what reinsurance lawyers do in Bermuda. Many corporate lawyers who are involved in the formation of new companies and advise on transactions appear in a courtroom only once in their career (when they are called to the Bermuda Bar).

The majority of reinsurance disputes involving Bermudian companies are not fought out publicly in court, but are resolved in private by arbitrators.

Bermuda has a very good arbitration law and arbitration clauses are common in reinsurance contracts.

Most reinsurance disputes are concerned with the understanding the meaning and effect of abstruse contractual language, which the parties have agreed (sometimes to the surprise of their advisers).

Those who earn a living trying to make the world safe for reinsurance companies, should perhaps be grateful that underwriters and brokers do not pay as close attention to the meaning of words as do lawyers.

To quote another English judge (Mr. Justice Lawrence), writing at the start of the 19th Century: "It is wonderful, considering how much property is at stake upon instruments of his description, that they should be drawn up with so much laxity as they are, and that those who are interested should not apply to some man whose habits of life and professional skill will enable him to adapt the words of the policy to the intention professed by the parties''.

Sign of success: The construction of the ACE and XL headquarters buildings are the most visible manifestations of the reinsurance industry's success in Bermuda.

N.B.

This is the exact same Law Matters supplement that ran in The Royal Gazette on 20th September, 2000. However do the printing problems that affected the quality of the print, it was pulled from the circulation and did not appear again until the 9th October, 2000.