EY executive director Andy Smith reflects on how the evolution of the life re/insurance sector in Bermuda has affected the jurisdiction and looks ahead to the challenges and opportunities for this increasingly significant part of the Bermuda insurer landscape.
While in recent years special purpose insurers stole the headlines as being the fastest growing part of the Bermuda insurance sector, many were surprised to hear that in 2014 the fastest growing sector was life, or long-term as it is referred to by the Bermuda Monetary Authority (BMA).
Prior to 2011, when the BMA revised the classification criteria for the long-term sector, relatively little information was publicly available about it. While a few of the better known, public company, reinsurers associated with Bermuda had life businesses that were visible, there were a number of affiliated reinsurers of US and European insurance groups that were less visible and also a handful of insurers, again affiliates of large groups, writing business further afield.
While the changing, and increasingly robust and transparent, regulatory environment over the past half-dozen years may have led some companies to exit Bermuda, others cite the robust regulatory environment as a reason for their establishment of a licenced insurer in Bermuda. The figures show that the net position has been an increase—the largest is the Class E group, companies with balance sheets in excess of $500 million, per the BMA website in March 2015, comprising some 24 licensed insurers versus 14 in 2012.
There is variety in the Bermuda market, with some companies typically focusing on products associated with providing security in retirement and long-term care situations, and others focused on mortality-focused products that can help ceding insurers manage risks associated with their balance sheet and/or asset and liability matching. There is also a mix of quota share business and block reinsurance.
As pension fund managers look for diversification and return in a low interest rate environment and investment managers look for additional float to invest, there has been a renewed interest in this sector, increasing the pool of capital, and thus market capacity.
What this means for Bermuda
Putting aside the direct economic benefits of simply having more people employed, if attendance at the inaugural conference of the Bermuda International Long Term Insurers and Reinsurers Association (BILTIR) is a good indicator, it means Bermuda now has a critical mass of life insurance professionals living and working here, or as frequent visitors.
A strong life sector provides Bermuda with diversification within the international business sector, the fortune of life insurance companies is arguably uncorrelated with the wider Bermuda re/insurance market and some, such as those with portfolios of fixed annuities or annuities with guarantees, have some countercyclical correlation.
It also means a stronger service sector. As a professional service provider EY has seen a real uptick in the number of life-focused engagements and in view of this trend we have hired three new actuaries in Bermuda, including a life-focused Fellow of the Institute of Actuaries (FIA) from Europe, along with a number of other life professionals.
We have seen demand from a number of firms setting up in Bermuda, with typical help needed with their business plan creation, BMA licence application, the Approved Actuary role and tax considerations.
While these demands are common with those we typically see from non-life carriers seeking to establish a business in Bermuda, for life carriers we have also seen demand for transactional support associated with the peak demands around block reinsurance both from a pricing perspective and some more complex regulatory advice. The regulatory advice reflects the wide geographic spread of ceded reinsurance in this sector.
For life reinsurers of a certain size, covering classes C and D and perhaps the smaller or block reinsurance focused within Class E, we can foresee an ongoing business model where professional service providers help manage peak demand for specialist skills. This builds on an existing model where it is relatively common for administrative functions to be outsourced to professional insurance managers.
The changes in the Bermuda regulatory environment present some particular challenges for pockets of the life sector, but recognition by Europe as equivalent under Solvency II is also likely to present new opportunities.
The consultation paper issued in December by the BMA on the Economic Balance Sheet presents key challenges in relation to those re/insurers that have investment risk stretching out many years into the future and the upcoming trial run process and subsequent finalisation of the rules will be important. Capital requirements are arguably one of the reasons that fixed or guaranteed annuities are less common in Europe than the US and these products form a key part of the Bermuda reinsurance landscape.
Conversely, regulatory change also creates opportunity. As European insurers seek to cede capital-intensive risks Bermuda reinsurers can be the link that brings together the new capital entering the market and these insurable risks. It will be increasingly important that reinsurers can present and explain bespoke models and risk mitigation strategies to the BMA, while providing solutions that fit with European insurers’ needs.
Further opportunity will come as European reinsurers or those with European interests look to expand internationally. Bermuda has a reputation as a leading reinsurance market with a well understood legal and regulatory system, an accessible regulator and a strong service sector.
The life or long-term sector is already a well-established part of the Bermuda business environment, and one that is growing quickly. It offers diversification to many financial sectors through the deployment of capital and is well positioned to take advantage of opportunities from the US and Europe. The increased maturity and readiness of the life sector, along with suitably skilled professional service providers, means that maybe it is time to let the life secret out of the bag.
Andrew Smith is an executive director at Ernst & Young Ltd, based in Bermuda. He can be contacted at firstname.lastname@example.org
Bermuda was one of the first jurisdictions to gain qualified jurisdiction status from the National Association of Insurance Commissioners (NAIC) the US standard-setting and regulatory support organisation. This elite status, initially enjoyed alongside the UK, Germany and Switzerland, means that reinsurers licensed and based in Bermuda are eligible to be certified for reduced reinsurance collateral requirements, potentially improving capital efficiency.
On January 1, 2015, Japan, France and Ireland joined this elite group.
If Bermuda is successful in the long anticipated achievement of ‘equivalent’ status under the European Solvency II regime, further opportunities to achieve greater capital efficiency for those ceding reinsurance from the EU will be secured. Equivalence under article 172 will mean the reinsurance provided by Bermuda reinsurers will be treated on the same basis as that from EU-based reinsurers, and equivalence under article 227 broadly means European groups will not be subject to additional European capital requirements in relation to their Bermuda subsidiaries.
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