In a relatively short period Bermuda has become the world’s leading offshore insurance centre and the largest domicile for captive insurance. The pioneer of finite reinsurance, its reinsurers play a key role in providing global reinsurance capacity. Bermuda companies have invested heavily in the restoration of the Lloyd’s market, providing a significant portion of Lloyd’s corporate capital. They also invaded the US with a flurry of mergers and acquisitions.
In a corporate environment where Fortune 1000 firms are seeking effective alternatives to pre-packaged, traditional insurance, Bermuda firms are being used to control expenses, create more efficient risk management and access intellectual capital in a concentration not always available in onshore markets. Captives are insurance companies developed and controlled by firms and organisations for their own insurance purposes. The insureds are also the share-holders, developing a profit line, essentially, through their own insurance premiums, thus reducing insurance costs. Bermuda is, by far, the biggest captive domicile. But the Bermuda insurance business is not just about captives.
Increasingly, buyers of insurance found that the innovation and creativity that brought Bermuda the lion’s share of the captive insurance market is the very ‘out of the box’ thinking that can forge new risk management solutions for large, complex risks. There was an astounding influx of capital, and business, into the Island in the eighties and nineties. Bermuda’s unique system of regulation allowed creative business minds from around the world to originate better risk management and other financial transactions on the Island. Companies with specific risk management problems are leaving off-the-shelf products in traditional markets, and going to Bermuda where solutions can be custom made. Bermuda is the World’s Insurance Laboratory, a market with an unusual agility and a concentration of insurance and capital market talent. Business is being drawn to an environment where deals get done in a market which dares to rival New York and London.
Bermuda started as a captive domicile in the sixties, with onshore companies seeking a climate where business could be written in a less restrictive environment, and their capital could appreciate on a more tax competitive basis. Bermuda also had an infrastructure of legal, accounting and management expertise. In the eighties, capital began moving into Bermuda, spurred by the lack of capacity from traditional insurance markets. In some cases brokers and major insurance buyers put their own capital up to form new risk management vehicles. Bermuda was the most advantageous domicile to site these new companies, firms that would have a real chance to flourish in an environment where regulation favoured growth and innovation.
Commercial insurers like ACE Ltd, XL Capital Ltd and finite reinsurers Centre Solutions Ltd were quickly regarded as global leaders by their international peers. The rapid financial growth of many of the Bermuda insurers and reinsurers made other investors, increasingly from investment banks and leading insurance and reinsurance firms, to see Bermuda as a breeding ground for success.
Reinsurance capacity for catastrophic risks diminished significantly in the early part of the nineties after Hurricane Andrew wiped out homes and the assets of their insurers. Investors saw Bermuda as the place to start new ventures for the reinsurance of high severity, low frequency risks. To build a powerhouse that could sustain claims for catastrophic risks, you need an environment where orderly growth can be accomplished, unfettered by unnecessary regulatory oversight. Unlike their onshore counterparts, the new reinsurers had no history of long tail liabilities with asbestos and other pollution claims. Their capital was unencumbered. International buyers in the market for reinsurance were satisfied that Bermuda reinsurers would be there to pay the claims. A prolonged soft market made insurance and reinsurance buyers increasingly apt to seek out strength and security in Bermuda.
Innovation, intellectual and financial capital, and reasonable and effective regulation are key reasons why Bermuda continues to attract significant business. The next wave of insurance and reinsurance vehicles, together with hybrid forms of risk management solutions are being formed now to capitalise on the convergence of the financial and insurance markets. That interest in the securitisation of risk is being driven from Bermuda.
Official figures indicated that 96 new insurance companies were added to the Bermuda register during 1998, the fifth consecutive year of 90 or more incorporations. It brought the total number of international insurers to nearly 1,500. A record 41% of the 1998 insurance formations came from new class 3 companies; a group which includes rent-a-captives, finite risk reinsurers, agency captives, commercial carriers and captives deriving more than 20% of net premiums from unrelated risks. Class 3 formations accounted for the biggest single category of new companies in 1998, while class 1 and class 2 company formations comprised 19% and 21%, respectively.
Almost 70% of the new companies formed were captives, which indicated the continued attractiveness of the Bermuda market for captive formations. The growth in the professional insurance and reinsurance sector was attributable to a sustained high level of interest in the Bermuda market throughout 1998 and the continued develop-ment of the Island’s commercial insurance industry. Indeed, Argentina, Hong Kong, Japan, Luxembourg and South Africa were among the non-traditional sources of new business for the Bermuda insurance market, although the bulk of the beneficial owners of new insurers in 1998 were US corporations and Bermuda insurers.
The Bermuda market in 1997, reflecting underwriting restraint and increased security, recorded a 3% growth in net premiums written to US$20.4bn, compared with a 14% increase in its capital and surplus to a new high of US$48.4bn. Total assets also increased by US$11.9bn to reach US$111.8bn. It was apparent that the Island’s captive insurance business, as reflected among Bermuda’s class 1, class 2 and certain class 3 companies, still attracted new capital. Almost US$2bn of new capital and surplus flowed into the class 1 and class 2 sectors, most of it going into class 2 insurance entities. The combined capital and surplus of those two classes rose to US$18bn while their combined net premium writings finished the year at approximately US$4.8bn, down slightly from 1996. Another important aspect of this capital expansion was the growth of the class 3 sector of the market. During 1997, the capital and surplus of Bermuda’s class 3 companies rose by US$3.5bn to finish at almost US$20bn.
The balance sheets of Bermuda's class 4 excess liability and property catastrophe reinsurance companies are very impressive as well, and this is supported by the continued strong ratings given to these companies by A M Best, Standard & Poor’s and others. The continued expansion and diversification strategies of the larger commercial insurers were contributing to the industry's growth. Standard & Poor’s said the Island was home to some of the most creative minds in the insurance industry and remained one of the few places in the world where large and unusual risks can be underwritten. Bermuda continued to out perform competitive markets. Buyers were going to the market which was a leader in new risk management solutions, leading the world in securitisation and other areas of alternative risk transfer. The industry maintained pricing integrity in the face of rate softening internationally. Bermuda’s insurers not only resisted the pressure to chase rates downwards, but continued a conservative policy towards their key under-writing ratio of net premium to capital and surplus. The statistics pointed to an industry wide premium to capital surplus ratio of 0.42:1 in 1997 compared to 0.47:1 in 1996. Further, the Bermuda market companies and regulators, in a unique system of regulation, actually work together and adhere to a policy of knowing their customers.
The regulatory framework is a risk based system, proven to be very successful. It is a key reason why Bermuda is a leader in the convergence of the capital and risk manage-ment markets. The UK's national audit office, in a report which reviewed Britain's contingent liabilities in dependent territories, said Bermuda's shared regulatory approach to the supervision of insurance is a model example for other British Dependent Territories.
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.
Email: feedback@bermuda-insurance.org
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com
