Bermuda: the new standard setter?

The citizens of Hamilton, Bermuda, are well used to seeing expensively dressed business executives drifting in and out of their gleaming glass and metal towers. But they may not be aware that their small island in the mid-north Atlantic – 22 square miles in size with a population of just 65,000 people – is increasingly viewed as the capital of the global insurance industry. How has this happened?

The Bermuda story really kicked off in 1986 after an explosion in legal liability claims in the US in the mid 1980s – in particular relating to asbestosis – caused a severe capacity crunch which meant that US industrial companies were virtually unable to buy high-level insurance at any price.US insurance broking giant Marsh&McLennan and a group of Fortune 100 companies joined forces to form two Bermuda-based vehicles – Ace and XL – that would self-insure these high severity/low frequency risks. In a sense they were group captive companies to the commercial insurance world at large.

Since then, the island has never looked back. Out of Bermuda in the past few years have come many of the most important innovations in the insurance industry – such as ART, transformers, special purpose vehicles and securitizations – and the island’s reinsurers are at the cutting edge of the convergence between insurance, banking and capital markets.

So it is no surprise that the $10 billion of new capital that has gone into start-ups and existing reinsurance companies as a result of the September 11 catastrophe and the return of hard market conditions should all have gone to Bermuda.

By comparison, Lloyd’s of London announced in December that its underwriting capacity for 2002 would increase by £1.3 billion to £12.3 billion. Although this is a record for the 300-year-old London market, and further confirms the confidence of insurers and investors in the industry’s prospects this year, it also underlines the comparative advantages that Bermuda now enjoys in attracting new capital.

There are many reasons why Bermuda appeals to insurance companies. Attractive tax and accounting treatment is one major draw, as is the relatively light regulatory environment. But industry executives say the chief attraction is the ability to do the business that you want to do quickly, and in the way you want to do it.

“One of the fundamental benefits to doing business here is the rate and form freedom that you can enjoy,” says one reinsurer. “The freedom for an underwriter to write the business he wants to write, using the language that he and his company want to use, charging the right price for the risk, is the most compelling reason for coming and setting up shop here. In no other jurisdiction do you have the same freedom.”

Other industry observers caution that the lightness of the regulatory environment is a cause of some concern to regulators in the UK, the US and other major economies.

Last December the Bermudan government announced that it was shifting the regulation of the insurance industry from the finance ministry to the Bermuda Monetary Authority with effect from the start of this year. The move, which was recommended in a report prepared for the UK government by KPMG, was designed to separate the licensing and supervision process from the political process.The move was also made at the encouragement of US and international regulatory bodies.

Bermuda-based professionals say that any perceptions that offshore business is somehow riskier than any other are wrong – most of the US insurance companies that had earlier voiced concerns about the migration of the market offshore have now established their own operations on the island.

“Bermuda is one of the strongest-capitalized insurance markets in the world,” says one market participant. “Here there is roughly $1 of capital for every 50c of premium written; in other markets it is more like $1 of capital for $2 of premium. One of the main reasons people buy reinsurance here is that these are strongly capitalized companies and they know that they will pay out if and when the time comes.”