The Bermuda Stock Exchange ("BSX") and The Catastrophe Risk Exchange, Inc. ("CATEX Onshore") are proposing to create a new exchange in Bermuda which will be operated by a joint venture company to be called CATEX (Bermuda) Limited ("CATEX Bermuda"). Upon inception, CATEX Bermuda will be the world's first offshore, computer-based risk exchange where members may cede, exchange or purchase risk electronically.


Ninety percent of the most costly catastrophes in history have occurred in the last eight years - insured losses for Hurricane Andrew amounted to $15.5 billion; the Northridge earthquake amounted to over $10 billion; and the Kobe earthquake amounted to approximately $3 billion! If this disconcerting trend continues, as is predicted by some insurance industry experts, many property and casualty insurers could face the threat of insolvency. CATEX Bermuda is intended to provide a means for primary insurers and re-insurers of property risks to access an electronic exchange which will allow them to diversify their "portfolio of perils" at a lower cost, consequently diluting their overall risk exposures. The guiding principle of CATEX Bermuda is that catastrophe risks will be exchanged on a risk-for-risk or risk-for-premium basis.

It is proposed that any exchange of catastrophe risks between members ("Members") (see "Membership" below) will be treated as a re-insurance transaction in line with current insurance statutory accounting requirements. CATEX Bermuda will allow insurers and re-insurers to trade risks with other parties which have written risks in different geographic locations and have insured various types of property against a variety of different perils using an open "bid and ask" market or exchange.

Overall. CATEX Bermuda seeks to provide Members with the ability to:

  • access a new electronic posting system;
  • cede, exchange or purchase risk in predefined packages with different geographic locations and different perils with no limitations on the types of risk or the geographic locations that can be offered;
  • trade risk-related derivative products, such as put and call options on industry standard indices, Banks and investment banks will be able to utilise the market, thus bringing risk issuers and players in the capital markets together; and
  • communicate with other Members through e-mail and other messaging tools over a secure, encrypted intranet.

The CATEX trading system will provide for the execution of reciprocal re-insurance contracts, or "risk swaps", whereby two risk-bearers will assume partial, reciprocal liability for a defined component of each other's risk. For example, one company may cede $50 million in Florida windstorm exposures to another insurer, and assume in return $100 million of Midwestern tornado exposures. To meet the differing needs of the trading companies, the amount on each side of the trade, the specific perils and regions involved, and the percentage co-payment can all be negotiated.


Risk-bearers and their brokerage will be able to negotiate and complete trades (anonymously if desired). Trades will be registered with CATEX Bermuda which, if requested, will be able to randomly select property risks exchanged from the respective books of business of the transacting parties. The exchange will operate five days a week from 8:00 a.m. to 7:00 p.m. (Atlantic time).

On an exchange of risks, a fee of $150 per $1 million of risk transferred (i.e. limit) will be payable to the exchange by both sides. On an assumption of risk, either the purchaser or the seller must pay a commission of 0.75% of the cash premiums to the exchange.

Postings made on the CATEX Bermuda system will also be posted on the CATEX Onshore, a company that has been in existence since October, 1996, and visa versa. It is proposed that, for tax purposes, postings made on CATEX Bermuda may be responded to by members of CATEX Bermuda which are resident in the U.S. and by subscribers to CATEX Onshore, but only through a licensed intermediary which is a full member of CATEX Bermuda. In this way, the system will seek to duplicate the procedures by which Bermuda based insurance companies currently write insurance business with the U.S. resident companies.


  • Insurers with an excessive concentration of business in a specific geographic area or in any specific geographic area or in any specific peril seeking to dilute their probable maximum loss and diversify their portfolio of perils;
  • Re-insurers which wish to trade exposures under all types of re-insurance contracts, including facultative, excess of loss and quota share contracts;
  • Re-insurers which sell coverage for a specified peril in a designated area for a certain price;
  • Intermediaries which represent a non-Bermuda based risk-bearing entity;
  • Captives which seek to adjust and dilute their potential exposures; and
  • Captives which are searching for the type of coverage which is difficult to find.


CATEX Bermuda will adopt the approach of separating membership from equity ownership. Insurers and Re-insurers, Insurance Brokers, Hedge Funds and Investment Banks will be able to join CATEX Bermuda. It is proposed that there will be at least four types of membership:

i)FOUNDER MEMBERS - Founder Membership will be limited to a maximum of 15 and will carry certain benefits such as equity participation in the exchange by way of non-voting, convertible preference shares and representation on the Advisory Board of the exchange. Founder Members are required to be Bermuda incorporated or permit companies which are licensed under the Insurance Act 1978. The Founder Membership fee is $100,000 (reduced to $70,000 for applicants which are listed on the BSX).

ii)FULL MEMBERS - Full Members will be able to assume risk across the exchange and/or trade risk-related derivatives on the exchange, or brokerage deals across the exchange. Full Members are also requires to be Bermuda incorporated or permit companies which are licensed under the Insurance Act 1978.

iii)SIGNATORY ONLY MEMBERS - Signatory Only Members will not be required to be Bermuda incorporated or permit companies but they will be required to have an affiliation with a Full Member which is a licensed intermediary in Bermuda and they can only negotiate business across the exchange though that Bermuda licensed intermediary; and

iv)SERVICE PROVIDER MEMBERS - Service providers such as lawyers and accountants are eligible for restricted membership and may have access to the communication tools but will not be able to post or browse postings.


Application to the Bermuda regulatory authorities for the incorporation of CATEX Bermuda as a local company will be by way of a private act of the Bermuda legislature ("Private Act")during the current session of Parliament. The establishment and incorporation of CATEX Bermuda is subject to the passing of the Private Act. There are no assurances that the legislature will approve the proposed company or it's structure; however, if it is approved, a pilot trading program would subsequently commence and go live perhaps during the second quarter of 1997.


The Private Act will seek to ensure that the insurance products traded on CATEX Bermuda are acceptable to the Registrar of Companies in Bermuda as "Contracts" under the Insurance Act 1978, and qualify as "general business assets" and "relevant assets" under the Insurance Returns and Solvency Regulations 1980.

CATEX Bermuda will be supervised by the Bermuda Monetary Authority (which supervises "financial institutions", including the BSX). The Private Act will provide that, in carrying on its business, CATEX Bermuda will not be deemed to be an intermediary for the purposes of the Insurance Act 1978.


The Emergence of CATEX Bermuda as the world's first offshore electronic risk exchange attests to Bermuda's expanding leadership role in the world of insurance and to its increasing sophistication in the field of electronic commerce.

The insurance team of Appleby, Spurling & Kempe has been actively contributing to the growth of Bermuda's dynamic international insurance industry by our involvement in formulating and recommending changes to relevant legislation and advising on innovative corporate structures. Our Insurance Team is the largest practice area within the firm and comprises ten corporate attorneys practising almost exclusively in the insurance fields and twelve full-time dedicated corporate administrators. Should you wish to find out more about CATEX Bermuda, please contact Warren Cabral, Head of the Insurance Team, using the telephone or facsimile number or e-mail address printed on the first page.

The Insurance Team Attorneys of Appleby, Spurling & Kempe are:
Warren Cabral (Head)
F. Chesley White (Deputy)
John D. Campbell Q.C. (Senior Partner)
Richard D. Spurling
Kenneth E.T. Robinson
Douglas H. Molyneux
Michael J. Burns
Timothy C. Faries
Gigi Barit
Brian J. Patterson

The insurance Team Corporate Administrators of Appleby, Spurling & Kempe and their secretaries are:

Insurance Team I

Cheryl S. Harney (Corporate Group Manager)
Peggy A. Tucker (Deputy)
Nicola J. Backeberg
Michelle F. Smith
Jill D. Paynter
Kevamae Sampson - Team Secretary
Tonita S. Eversley - Team Secretary
Marcia Gillbert - Team Secretary

Insurance Team II

Audrey M. Mansell (Corporate Group Manager)
Judy Taylor (Deputy)
Cilma A. Lamb
Shari L. Simons
Stacy Grant
Dionne G. Hackett - Team Secretary
Marcia Gilbert - Team Secretary

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.