Bermuda's sense of unity
The past two years have been something of a rollercoaster ride for the insurance industry. All financial services companies were severely tested by the global financial crisis in 2008, and Bermuda’s re/insurance companies also had to contend with some expensive catastrophes, the biggest of which was Hurricane Ike.
Last year, however, the circumstances were reversed, enabling the industry to post significant profits and enter 2010 in good shape.
Against this backdrop, the mood among the 300-plus professionals who gathered at the Fairmont Hamilton Princess Hotel for the Ernst & Young (E&Y) Property/Casualty Year-end Outlook 2009 conference on December 10 was understandably upbeat.
The estimated record attendance for the 12th annual event coincided with the first staging of an industry leaders’ panel discussion. The audience, composed mainly of accountants, also witnessed presentations on the evolving rules governing their profession.
Jonathan Reiss, an E&Y Bermuda partner and organiser of the conference, said the event has gained in stature and popularity over the years. “I remember when I was pleased because we had 60 or 70 people who came,” he said. “In the last couple of years, it’s become a well-known event.”
“The feedback was very positive, and people really appreciated the panel. They provided some great dialogue—it was a real discussion. I find it very useful to hear people of the calibre of Don Kramer talk about the bigger picture in the industry.”
The panel discussion opened the event, offering attendees an overview of the industry, with contributions from Neill Currie, chief executive officer of RenaissanceRe, as well as the bosses of two Class of 2005 start-ups, Don Kramer, chairman and chief executive officer of Ariel Re, and David Brown, chief executive officer of Flagstone Re, and Peter Porrino, E&Y’s global director of insurance industry services. You can read highlights from the panel discussion on page 28.
Kramer is something of a living legend in Bermuda. During his illustrious career, he has founded a string of reinsurance companies, including (US-based) NAC Re, Tempest Re and, more recently, Ariel Re. He served as vice chairman of the largest company to emerge from the Bermuda market, ACE Ltd. In an interview with Bermuda Re shortly after speaking on the panel, Kramer summed up his thoughts on the industry’s prospects:
“In 2010, we should have a good year, but there’s no way it will come close to 2009, which was exceptional—a 1 in 50, or maybe a 1 in 100 year,” he said. “There was such a confluence of financial recovery with a lack of catastrophic losses that it left us with a magic year. But, at the same time, pricing is still pretty good. And if we revert to normal in 2010, the industry will continue to do very well.”
The lack of catastrophes may result in some downward pressure on pricing, but Kramer believes the Bermuda market is still well placed. “Prices have certainly levelled off somewhat, but they haven’t fallensignificantly,” he said. “In the volatility business, which is still Bermuda’s specialty, there is still adequate compensation for the amount of risk involved. Just because something doesn’t happen doesn’t mean that it couldn’t. Every one of us will limit the amount of aggregate risk we take. I think we may see some lower prices, but I don’t see a reversion to a soft market.”
The casualty business, however, is “under stress”, Kramer added, from the effects of a five-year continuous soft market and interest rates at record lows. The Ariel Re chief executive does not expect to see the Island’s companies slacken their underwriting standards in the quest for market share.
“Bermuda has been very disciplined in that regard,” Kramer said. “You’ve seen many Bermuda companies step back from business and reduce volume. We have a great track record. We have been through soft markets before and we haven’t seen a major, high-profile Bermuda company fail. So we have a good reputation.
“Our acceptability and our market share have grown tremendously. When we started, Lloyd’s considered us to be the arch enemy—now Lloyd’s is our valuable partner. That’s a perfect example of the Island’s credibility. And, of course, the Bermuda Monetary Authority’s (BMA) credibility is also going up every day, because it is really putting resources into regulation.”
Facts and figures
The post-panel section of the conference focused largely on the changing accountancy landscape. Bermuda-based E&Y partner David Brown examined reporting under US Generally Accepted Accounting Principles (GAAP) and the requirements of the US financial regulator, the Securities and Exchange Commission. Philip Burrill, another E&Y Bermuda-based partner, then delivered a lecture entitled ‘The Changing Regulatory Landscape’.
Jennifer Weiner, an E&Y partner based at the firm’s Boston office, gave the keynote address, which was an examination of the International Financial Reporting Standards (IFRS).
According to Jonathan Reiss, regulation should be a key area of focus for Bermudian companies—particularly with the European Union’s new Solvency II rules for insurers scheduled to take effect in 2012. Reiss, however, is not convinced that all companies understand the full scale of what they need to do to comply, despite the efforts of the BMA. The insurance regulator is working towards achieving the mutual recognition needed to ensure that Bermuda companies will not operate at any competitive disadvantage in the EU when the new rules come in.
“I think the main thing people need to focus on is all the change coming about as a result of Solvency II,” Reiss said. “The BMA is committed to achieving regulatory equivalence and the market is very supportive, and it’s critical that we achieve that to advance Bermuda as a jurisdiction. Despite the fact that the BMA made tremendous progress during the year, there is still a considerable amount of work to do. There are many companies that don’t appreciate how much work they have to do to keep pace with regulatory change, because the rate of change is accelerating.
“IFRS, in many ways, dovetails with Solvency II. It has the potential to create a lot of work and it’s a moving target. Some companies are much more prepared than others.”
Reiss is hopeful that the raising of the bar in capital and corporate governance requirements that Solvency II will bring will not hit the captive insurance companies that form the foundation of Bermuda’s insurance industry. “The BMA is doing everything it can to insulate the captive sector from these regulatory changes,” he said. “Most of the initiatives that are part of Solvency II don’t need to be applied to the captive industry. I think everyone’s hoping that outcome can be achieved.”
Another key challenge for re/insurers, Reiss believes, is the need to stay disciplined with underwriting standards in a declining rate environment. But with the capital markets having all but frozen over the past 18 months, Bermuda companies have already proven their ability to come through a testing period, he added.
The blame game
The Island has also had a testing year as a jurisdiction. Leaders of the world’s most powerful nations have pointed fingers of blame at offshore financial centres, as they seek extra tax revenue to fund the expensive bailouts of their own struggling economies. In April, Bermuda was placed on the Organisation of Economic Cooperation and Development’s (OECD) ‘grey list’ of jurisdictions considered not to have done enough to meet global tax transparency standards. By June, the Island was promoted to the ‘white list’, after it signed its 12th tax information exchange agreement (TIEA) with the Netherlands. Since then, the Bermuda Ministry of Finance has continued its accumulation of TIEAs, with at least 19 currently and several more negotiated and awaiting ratification.
Then there are the perennial threats of a potential change in the US taxation rules that could be harmful to the Island’s insurance industry. The recent budget proposals announced by President Obama include some changes that are currently being assessed and are similar, but not as drastic as those introduced in a bill by Democratic Congressman Richard Neal. These proposed changes would raise the effective tax rate for any non US-based insurance groups whose US subsidiaries cede risk to their non-US affiliates through reinsurance.
Reiss said he was feeling much better now about the global threats faced by the Island than he was six months ago. “I see less new activity on legislation that could harm credible offshore jurisdictions,” he said. “And there is a good case that Bermuda is not like other offshore centres, and I think that message is getting through.
“I think the OECD actions will continue and that the bar to be on the white list is going to be raised. I’m confident that the Ministry of Finance is doing a very good job and when that bar gets raised, Bermuda will meet the necessary standard. I’m optimistic that as this tax haven saga plays out, we will be on the right side of it. I think the OECD is concentrating more and more on those who aid and abet tax evasion—and Bermuda is not part of that group.
“I’m also feeling more optimistic about the ultimate impact of legislation such as the Neal Bill. Some of those proposals are anticompetitive, and people such as the ABIR (Association of Bermuda Insurers and Reinsurers) and Don Kramer have gone to Washington to make the case that they would harm US consumers. Those efforts are paying off.”