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Bermuda's expanding scope The proving ground for alternative risk transfer solutions By Michael J. Moody, MBA, ARM For the past 30 years, Bermuda has established itself as the world’s premier captive insurance domicile. Over that time frame, Bermuda has managed to attract and maintain about 1,000 captive insurance companies. And that fact is not lost on the government officials of this tiny island paradise. At the recently concluded Bermuda Captive Conference, Bermuda’s Premier, Alex Scott, told attendees that captives are Bermuda’s core industry. He emphasized, “Captives are our bread and butter.” Scott assured the numerous captive owners assembled at the conference that they, the captive owners, were Bermuda’s sole clients and they would continue to stay that way. And although there have been rumors that Bermuda will begin to limit the number of captive approvals, Premier Scott did everything he could to dispel them. “Let there be no doubt that our interest in growing our captive industry continues unabated,” said Scott. “No limits have been set, and there is no intention of doing so.” He went on to discuss the unique public/private partnership that has been forged over the years and how it has fostered a sense of ownership for all parties involved in the Bermuda experience. Premier Scott also touched on the development of Bermuda’s risk-based approach to captive regulation, which he said, “takes into account the unique risk profiles of captives.” New direction While it is clear that Bermuda has worked hard to develop its reputation as the world’s captive leader, the island has also become a home for a number of other unique risk transfer mechanisms. According to Alan Waring, chair of the Bermuda Market Solutions Committee of the Bermuda Insurance Development Council and president of Crump International, “There are a number of other insurance markets in a parallel universe in Bermuda.” Most obvious, he points out, “is the CAT reinsurance market.” And as is the case with captives, the reinsurance business has “a meaningful partnership between government and industry,” says Waring. For the most part, it is an enabling environment rather than an overburdening one. The regulation of the insurance industry in Bermuda began with the passage of The Insurance Act of 1978. In addition to the regulation of insurance companies, it also extended to the registration of insurance managers, brokers, and agents involved with the insurance business on the island. The Act remained the sole regulatory control until 1995, when it was amended in response to a changing marketplace. The primary feature of the revision was the establishment of four classes of insurers. Captives historically fall within either a Class 1, 2, or 3. However, it’s the establishment of the Class 4 group that has led to many of the new reinsurance formations of the recent past. And it is this Class 4 group that is unique to Bermuda. The reasons to select Bermuda as a domicile are many. Frequently mentioned as a major contributing factor is the method of regulation that has developed between government and public companies. Many also will point to the well-developed infrastructure, which has many service providers in a number of segments with specific experience and expertise in the Bermuda insurance market. The various service providers that are available to the captive and reinsurance community in Bermuda are frequently internationally known and available for assistance. Expanding scope While the reinsurance industry was developing following the passage of the amended Act in 1995, it was not until the events of 9/11 that its development got on the fast track. At that point, large amounts of new capital responded to the needs of the industry post 9/11. Large amounts of unencumbered financial capital found their way to Bermuda, and a blossoming reinsurance community developed. Today this is a mature reinsurance market that is respected throughout the world. A similar occurrence followed Hurricanes Katrina, Rita and Wilma with new capacity entering Bermuda to respond to the need for CAT covers. Currently, Bermuda is reported to be either the largest or second largest center for CAT property reinsurance worldwide. And while many of the reasons that Bermuda is an ideal captive location are equally true for the reinsurance companies, Waring points out, “These reinsurance operations are, for the most part, set up in response to marketing opportunities. Bermuda offers a regulatory climate where the barriers to entry are few and you can get up and running quickly,” he says. This allows a carrier to take advantage of marketing opportunities as they arise. Waring also points out that Bermuda has an established marketplace with a constant flow of players. He says that there are insurers, brokers, reinsurers and capital markets involved in many deals at any one time. Thus, he asks rhetorically, “If you want to build up a business in CAT property, do you pick another domicile and hope to get noticed?” The other option, of course, is to start in Bermuda, “where there is a constant flow of activity.” Based on the recent past, it would appear that many startups have come to the decision to use Bermuda. The next stage of evolution Not that the development of a hugely successful reinsurance community was not significant enough, but Bermuda has turned the page on yet another phenomenon. Actually it is two separate and distinct situations. The first phenomenon deals with the maturing of the Class of 2001, those facilities that were started after the events of 9/11. Recently, a number of these companies have either issued IPOs or are in the process of issuing IPOs. This is just another sign of the maturing of this market segment. It shows the long-term value of the companies that have been formed in Bermuda and how critical they are to the success of the CAT property market. The second issue involves the movement of several highly visible organizations from the London market to Bermuda. Among the recent new arrivals are Amlin, Lancashire, Omega and Hiscox. When commenting on his firm’s move to Bermuda, Robert Hiscox noted that Bermuda was an attractive domicile due in large part to the concentration of capital and expertise. He indicated that the speed with which new companies can be licensed, which often can be several weeks, and writing business is second to none. Hiscox also points to a progressive regulatory and tax regime, which draws companies to the island. According to the Bermuda Insurance Update, Hiscox is credited with saying, “The (UK) government has never made one move to do anything but tax the insurers. They’ll never back a winner and now the London market is drifting away to better financial and regulatory climates.” Waring also points to the importance that a mature distribution channel can make in attracting potential insurers/reinsurers. He says that any organization, in any business sector, must have access to a successful distribution system to make its business run. Currently there are more than 30 brokers in Bermuda, many according to Waring with lengthy (over 30 years) involvement with the insurance community. This offers a maturity and level of experience that is not found elsewhere. “There is little doubt that today’s brokerage community in Bermuda is among the best in the world,” says Waring. Conclusion Having made several trips to Bermuda in recent months, I can hardly believe that this is the same little island I frequented 20 years ago. Today there are cruise ships, big buildings (mostly insurance company headquarters) and more construction. Bermuda has managed to take advantage of the opportunities that have been presented to them. It has established a regulatory climate that combines the best of public and private interest and has found regulators that encourage business while maintaining solvent companies. Today, Bermuda is a testing laboratory for risk management. New ideas and innovation abound. Creative people are drawn to this environment and will continue to advance progressive concepts. Not only does Bermuda continue to earn its title of the world’s largest captive domicile, but it keeps on finding new ways to justify its title as “The World’s Risk Capital.” * |
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