Chris Bonard of Ed Broking Bermuda takes a look at Bermuda’s place in the financial world—and what it can do to cement that place still further.
Each of the world’s re/insurance hubs has an identity and a role. London is the largest and the original. Miami is the gateway to Latin America, as Singapore and Dubai are to their own regions. The European and US markets alike lack a single dominant city, but their power-players, backed by substantial experience and capital, have extended these markets’ multiline offerings world-wide.
Meanwhile, thriving Bermuda ranks as the second-largest reinsurance market in the world, but its pedigree is relatively short, and it is surrounded by the Atlantic Ocean. That makes the Island’s raison d’être more difficult to pin down, which in turn makes the development of a broad and stable business base doubly challenging. However, the route to a more sustainable Bermuda lies before us.
I do not ignore Bermuda’s very valuable strengths, which include several stable and longstanding market niches. Its original purpose as a market for excess US casualty risks, particularly directors and officers liability (D&O), has not receded. Since then, during times of global capacity shortages, Bermuda has grown to become a large and extremely stable market for catastrophe risks. It is also a leader in the business and expertise of insurance-linked securities (ILS) and other forms of convergence capital.
In other segments, however, Bermuda has been regarded as something of a hard-market safe haven. Middle-market property risks, for example, have tended to reach Bermudian underwriters only during market upcycles—as indeed they are doing now. That business flow presents a superb opportunity for Bermudian carriers to entrench their position in this and other classes, creating a more sustainable market based on a more diversified pool of risks.
Major US carriers are re-underwriting their books. Lloyd’s has taken strong action which has reined in the market’s appetite in specific classes. European giants have cut back. Thus Bermuda has an opportunity to achieve some of the stability of business flow that those markets achieved long ago. If carriers here can seize the opportunities arising from displacement, and retain the business when current market conditions subside, the goal will be achieved.
It comes down to the distribution system that delivers business to Bermuda, and the eco-system we put in place to meet it. Our market is now very heavily skewed towards reinsurance and retrocession business, particularly for natural catastrophe business. The largest brokers play a very important role in the production of this business, but they are not the only possible source. To create sustainability, Bermuda must embrace additional distribution through independent wholesale brokers.
The US, Bermuda’s main source of original risk, is occupied by a wealth of independent brokers. They may be focused on wholesale, retail, or reinsurance risks. Most have visited our island, but left when they found that independent distribution was largely lacking. Few returned.
That is beginning to change. Ed is not the only independent wholesale broker to set up shop in Bermuda in recent months; several have made a genuine investment here. That is extremely positive news for the market’s risk carriers, since these new arrivals create channels for the independent distribution of risks originating with independent intermediaries in the US and further afield. In other words, six months ago an independent broker who needed Bermuda also needed to engage a competitor to place it. Now they do not.
Through this new channel, a broad range of business from non-aligned sources can now reach Bermuda under any market conditions, not just during times of global market stress. But to bring in business in the face of competition, Bermuda needs to sell itself to independent distributors much more intently. The market has fantastic levels of service, enormous expertise, enviable claims performance, a track record of longevity, Solvency II equivalence, and a strong and dedicated capital base deployed in part by almost all of the world’s major carriers.
Seeing the benefits
Bermuda should already be an easy sell, but we need to do more to make independent re/insurance distributors in the US and elsewhere understand all its benefits and see Bermuda for what it is. As an independent wholesaler, we will be playing an important role in that job of persuasion and edification. We will ensure that we present Bermuda to clients around the world as a long-term, stable market with a broad and deep risk appetite.
To make Bermudian carriers even more attractive, and make the most of our opportunities, we will have to improve our market’s trading infrastructure even further. Everyone is aware that Bermuda is an expensive place to set up and operate a business. Because of that, markets underwriting traditional property business have focused on the higher excess layers of the Fortune 1000. That is understandable, since it is difficult to build cost-effective capability to accept middle-market business. As a result, producers think only of sending the very largest risks to Bermuda, and then only when they could not be placed domestically, either in the London market or with the Europeans.
The advent of independent wholesale distribution in Bermuda should change that, through the introduction of new technologies. By trading electronically, a carrier in Bermuda can now see a great deal more relevant business, and assume a much larger and more diversified book as a result, without absorbing the enormous costs of engaging and housing an enlarged underwriting team. The Bermudian government has done a very good job of selling the Island’s technology message; we need now to embrace those technologies. It will then be our job to keep selling, and to sell hard to independent clients everywhere, not just in the US but in Latin America, Europe, and even in Asia. We need to explain that their risks can and will find an excellent home here, and that they can be delivered almost effortlessly.
Behind this lies another opportunity, one which takes advantage of the desire for capital—and particularly for alternative capital—to get closer to the insurance market’s original customers and their risks. Many major retail brokers and wholesalers have built managing general agent (MGA) platforms with appropriate local licensing. Only rarely do Bermuda markets supply their capital to such underwriting operations, despite the real opportunity that exists, especially with Bermuda’s expertise in convergence capital.
A huge, largely untapped opportunity lies in tripartite partnerships: traditional carriers take advantage by lending their risk expertise to alternative capital suppliers, perhaps through sidecar relationships, to support MGAs in selected classes of short-tail speciality risk. That would remove a significant share of the existing distribution chain’s burdensome acquisition costs, to reserve more premium for risk.
Such opportunities will appeal to Bermuda’s underwriters during the current hardening market, since they face a challenge to balance their risk exposures. Embracing new classes and sources will support efforts to build sustainability and eliminate the costly ebb and flow of business to and from Bermuda. An open approach backed by a small number of independent brokers will be good for clients and markets, and for Bermuda as a whole.
The island of Bermuda feels alive and open for business. Meanwhile, customers around the world seek greater choice. The recently landed independent brokers are well placed to champion Bermuda as an alternative, and to build innovative new channels that cost-effectively feed quality risk to Bermuda capital—conventional and convergent. Doing so will help to create an island ecosystem that is sustainable in the long term and welcomes the world.
Chris Bonard is chief executive officer of Ed Broking—Bermuda. He can be contacted at: email@example.com
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