8 September 2019ILS

Bermuda: punching above its weight

Bermuda has grown to be one of the world’s major financial hubs, a place of real influence.

For a small rock in the middle of the North Atlantic, it punches well above its weight in terms of its economy and the quality of the people working there. It has come as far as it has in terms of being a global hub and centre of excellence for risk transfer because of the leadership of certain individuals along the way.

As the world of re/insurance evolves and moves on, Bermuda needs to retain its position in the market. The likes of Dublin, Zurich, Singapore and Dubai have all upped their game and refined their offering in recent years, making a case for international companies and reinsurers specifically to base themselves there.

Smaller jurisdictions such as Guernsey and the Cayman Islands have also been busy creating an offering well suited to specific forms of risk transfer such as insurance-linked securities (ILS) in an attempt to prise business away from more established players such as Bermuda.

The pressure was exacerbated by moves in the US designed to limit some of the tax advantages re/insurers enjoy on Bermuda.

Based on most measurements, however, Bermuda remains at the very heart of the risk transfer business globally and is arguably stronger and more vibrant than it has ever been.

Ironically perhaps, it seems to have benefited from some of the uncertainty and turbulence in other parts of the world. Ongoing instability in the Middle East and economic uncertainty in key parts of Asia combine to make those regions less attractive as a hub for multinational companies.

Then there is the UK’s decision to leave the EU, which could have important consequences for many re/insurers based in the UK. Many have been reviewing their corporate structures and strategies. Suddenly, Bermuda’s Solvency II equivalence, implemented in 2016, looks very significant and becomes a sign of Bermuda’s long-term stability in an age of uncertainty and change.

Meanwhile, the government of Bermuda has been very proactive in recent years. It has been actively encouraging business to come to the Island via a wide range of measures that have recently branched out into fintech and insurtech, including uses for blockchain, where they have allowed firms to test out various fintech concepts via sandboxes.

Albert Benchimol, chief executive officer of AXIS and chair of the Association of Bermuda Insurers and Reinsurers (ABIR), stresses that the Island’s importance is far from diminished and it plays a vital role in the international risk transfer industry, leveraging its talent, expertise and capacity to ensure policyholders and customers are protected in the event of loss, and also to help reduce the global protection gap between economic and insured losses.

“First and foremost, the market remains a global leader in natural catastrophe and specialty market risk transfer—and Bermuda’s value proposition has never been more important,” says Benchimol.

“From traditional coverages for windstorms, wildfires, tornados and typhoons—and now in areas of development including cyber, mortgages and a range of specialty coverage—Bermuda plays an essential role in helping to protect families, businesses and communities across more than 150 countries.”

Similar statistics have been generated elsewhere. According to a 2015 report commissioned by the government from Washington DC-based economist Charles Ludolph, Bermuda supports an estimated 500,000 jobs worldwide—including 70,000 in the UK and 330,000 in North America—through trade, foreign direct investment and portfolio investment capacity.

Trade winds
Neville Ching, managing partner at Capsicum Re, offers a similarly bullish view. In his view Bermuda remains a key player in the global risk transfer industry. He feels that the global re/insurance market is in a state of flux at the moment facing tough headwinds and rating pressures but the strengths, geography and flexibility of the Bermuda market make it well equipped to overcome these pressures.

Ching points out that at the end of 2016, the Bermuda Monetary Authority (BMA) reported that the capital and surplus of commercial P&C reinsurers in Bermuda was £–110 billion ($133 billion), amounting to around 18 percent of the global reinsurer capital. He adds that according to Aon’s April 2019 Global Reinsurance Capacity report, the global capacity is $595 million and the global alternative reinsurance capacity is circa $90 billion. The Bermuda market share of the alternative capacity is around 58 percent, or $52 billion.

The above statistics underline how important Bermuda is in the market, but given the rapidly changing re/insurance landscape, is Bermuda able to retain this high profile position?

Benchimol is unequivocal on this: “Certainly. Bermuda re/insurers are serving their customers not only from the Island, but also from a growing network of branches and subsidiaries across the globe.

“With regulatory and political certainty a growing global concern, Bermuda is a trusted partner with stable government, world-class regulation plus Solvency II equivalence and US qualified jurisdiction status.

“The BMA—celebrating its 50th anniversary this year—has found its voice in international regulation, and more international market participants are establishing Bermuda platforms to build out their global profiles,” he says.

New opportunities
Benchimol stresses that the market has been quick to recognise new opportunities. He feels that Bermuda’s relentless willingness to explore new risks and new technologies, coupled with its world-class risk management, has helped directly propel its growth.

For example, he adds, two new specialty reinsurance startups—one the largest in Bermuda’s history—were announced earlier this year.

Ching adds that one of Bermuda’s strengths is its flexibility. It has a history of using this to respond quicker than other territories to global events. Its ability to deploy this flexible approach has enabled the market to evolve to face new challenges and new forms of risk.

“Recent M&A activity has confirmed the industry’s confidence in Bermuda as it’s been home to many of the sector’s largest transactions in recent years, such as AXA’s acquisition of XL Group for $15.39 billion and AIG’s purchase of Validus for $5.56 billion,” says Ching.

“Additionally, the market is positioning itself as the established leader in insurtech. The BMA has introduced two initiatives to provide a regulatory environment that supports the speed and flexibility needed for innovation while simultaneously protecting policyholders—yet another sign that Bermuda is once again responding to client demands and continuing to evolve as a marketplace.”

Benchimol says the Island remains the leading jurisdiction for the issuance of ILS, and that the total number of catastrophe bonds and ILS listed on the Bermuda Stock Exchange hit 302 at the end of 2018, representing a combined value of $30.92 billion, a new high for the exchange. Its market share of all ILS issued globally is close to 80 percent.

Incoming capital
According to Benchimol, investor capital comes to Bermuda because of the market’s expertise and talent in matching capital to risk. He feels that it’s also seeing a growing opportunity to leverage what some in the market are calling ‘partner capital’—ILS or alternative capital backing traditional reinsurer discipline, rigour and compliance to address customer needs.

He feels that it will be particularly interesting to watch this model mature in capital-intensive lines of business such as cyber.

Ching agrees that the ILS market continues to grow, but stresses that Bermuda remains the leading domicile for its issuance, and states that two-thirds of the world’s ILS funds are domiciled on the Island.

“The Island’s reputation is what makes it the market of choice for investors,” says Ching. “Despite recent challenges, nobody is running away. Yes, there have been some adjustments, but Bermuda has continued to serve its client base.

“ILS is here to stay, and Bermuda has a resounding lead. The market’s experience in this still-specialist area—alongside a ‘can-do’ attitude, favourable regulation, and appropriate tax advantages—drives the majority of investors and funds to continue to choose Bermuda, even as other domiciles compete in this space.

“These attributes, coupled with its ability to innovate and meet customers’ evolving and changing needs, ensures that Bermuda remains ahead of the competition.”

Benchimol points out that with ABIR recently celebrating its 26th year as the collective voice of the market, there is growing awareness of Bermuda’s importance in covering the world’s risks.

“ABIR shines attention on the market’s leadership position and the entrepreneurial spirit that is characteristic of many Bermuda companies,” he says, adding that this is evidenced by the facts: Bermuda supplies 60 percent of hurricane reinsurance to Florida and Texas, writes 40 percent of UK broker-placed property cat reinsurance, is host to 14 of the world’s 40 top reinsurers, and has paid a record quarter of a trillion US dollars to consumers and cedants over the last 20 years in the US and the EU.

Ching states that the last couple of years provide an example of how important Bermuda is to the market. Natural disasters have delivered more than $200 billion in claims over the past two years, inflicting serious losses, but Bermudian reinsurers have not only responded well, but remain solidly capitalised.

“Despite this period of hardship, I don’t know of anyone that has been disappointed with the performance of the Bermuda market,” says Ching. “In many cases, reinsurers have paid up before they were contractually obliged to. Step forward a client of Bermuda that hasn’t been serviced efficiently. I certainly don’t know of anyone.”

The report by Ludolph tells a similar story. Over the past decade, Bermuda-based companies have contributed $35 billion in payment of catastrophe claims to US clients alone, including 9 percent of 9/11 claims and 30 percent of insured losses from the US Gulf storms such as hurricanes Katrina, Rita and Wilma. The Bermuda market also contributes more than a quarter of capacity for Lloyd’s of London—a total of £–6.6 billion ($8.7 billion).

What next?
What must Bermuda do to retain its position in the market? Benchimol concludes that as a market, Bermuda must continue to deliver for its customers, investors and team members.

Moreover, it is essential that the Bermuda re/insurance market never loses sight of its purpose as an industry: to give people the courage to take necessary risks in the pursuit of their goals, and help people when they are down. This is manifested through the ability of firms on Bermuda as carriers to deliver great claims service.

“In addition, to deliver on its promise, Bermuda must continue to adapt and position itself to capitalise on the transformations that are happing within re/insurance,” he says.

“From digital advances and insurtech to new markets and emerging risks, Bermuda’s ability to be agile, innovative and responsive to customer needs will become increasingly important.”

Ching has similar conclusions. He says that Bermuda has always been good at adapting in the face of change—as can be seen by looking at its track record in the 1990s, 2002 and 2006. This is one of the main reasons that it remains an attractive marketplace. A period of change is presenting challenges to every market, but Bermuda’s robustness, combined with its strong and well-respected regulator and its strong geographic position enable it to maintain its position as a centre of reinsurance excellence.

Ching believes that it will continue to develop. “The market has proved itself able to respond to the customer, even when faced with emerging risks,” he concludes.
“If it continues to build expertise across diversified classes such as cyber, mortgage, life and the burgeoning insurtech space then it will continue to retain its position.

“The fact that industry veteran Stephen Catlin chose Bermuda to domicile his newly-launched re/insurer Convex says a lot about the quality of the market and its outlook for the future.”