Elliot Lane says the poor leadership of reinsurance start-ups is giving the industry a bad name

Has Bermuda's hot market gone cold? Katrina and her sisters, to paraphrase Burt Bacharach, could be the girls with the pin to burst its bubble.

Around 11 reinsurers lost money during 2005, compared to one the year before, and for every £100 paid in, the reinsurers paid out £117. Not a great argument to encourage investors that the domicile is filled with doyens of rigid technical underwriting.

In fact, the operational controls of many of the new reinsurance start-ups have raised a few eyebrows among investors and rating agencies alike. One interesting case is Lancashire Re which listed on the AIM market in December 2005 with a flurry and fanfare, backed to the tune of $1.1bn. It was given an A minus rating by AM Best and virtually every major London and New York private equity house committed capital, most notably Capital Z.

Impressive. But by March 2006, AM Best had changed its mind and placed the rating under review with negative implications.

One rating agency director said: "I can't remember ever seeing a company get a negative review within three months of its start-up. You have to question what is going on."

But one man among the investment community did not fall for the Lancashire Re hype. According to rumours, legendary Fidelity guru Anthony Bolton disregarded the management's arrogant pitch because they had acted as if they had the financial heritage of Google when they were merely a start-up. Last month, one of its founders, former Renaissance Re man Alex Richards, resigned from the operation for "family reasons", according to the company.

Renaissance Re has also had its problems. It was downgraded in November 2005 after its chief executive, James Stanard, resigned over the restatement of its Katrina losses. Ratings agencies worried that the operational controls of the remaining board were "unknown".

Ex-Ascot underwriter Richard Brindle heads Lancashire Re. He left Ascot, disgruntled after failing to take a senior board position. Also employed at the organisation is Charles Mathias, an ex-RK Harrison broker, who once worked for a Texan-based insurer that fell under the gaze of Interpol and was closed down. I should make it clear that Mathias was never implicated in any wrongdoing.

But what is disturbing is the amount of fluid capital that is flowing from private equity houses and hedge funds into the reinsurance start-up market with executives at the helm that do not have cast-iron business track records.

Lancashire is just one of a plethora of new ventures backed by hedge fund capital. One hedge fund manager said: "These reinsurers are attractive short-term operations that are benefiting from a hard market. Most hedge fund investors see Bermuda start-ups as a tax benefit more than a long-term investment."

Validus Reinsurance created by ex-Marsh chief executive Jeffrey Greenberg has had a difficult birth and has placed itself in the low frequency, high severity property and specialty business.

While the FSA and Eliot Spitzer have focused on the shenanigans of the broker community, certain dubious practices carry on in the underwriting community. One analyst sums it up neatly: "What the regulator needs to do is introduce the equivalent of a driving licence for underwriters. Otherwise more capital is going to wasted and more reputations burnt." IT