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15 November 2016ILS

Shaping Bermuda’s future: Part II

While Bermuda’s economy has largely been built on the back of its successful reinsurers in recent decades, as new generations of start-ups grew, diversified and matured, things are changing in risk transfer and Bermuda’s future generations of companies will look very different indeed.

As the barriers to capital entering the industry have slowly been eroded over the years, more funds, sidecars and insurance-linked securities (ILS) vehicles have been launched on the Island, variously matching risk with capital markets money and innovating in ways that will change the industry for good.

Reinsurers have got in on the act and most now have access to such facilities themselves. The line between what constitutes a so-called traditional reinsurer and these risk transfer entities is always blurring.

In this and the October issue we have focused on leaders and leadership and we split our lists of leaders depending on which sector they mainly operate in.

While driving forward a prominent reinsurer or innovative fund brings with it an associated element of the spotlight, we felt it was unfair that there are many unsung heroes of Bermuda working behind the scenes to make such ventures and their expansion beyond the shores of Bermuda possible.

Bermuda remains at the centre of innovation when it comes to the world of risk transfer but no new product or structure—from the very first captives to the most cutting-edge ILS structures—has ever been developed and worked without quality lawyers and accountants doing vital work behind the scenes.

“Bermuda is not just another offshore financial centre but is a stable, yet innovative, leader in the re/insurance and ILS sectors.” Ernest Morrison, CHW

On this basis, with the help of our in-house editorial teams and the many experts and advisers we speak to daily, we have identified nine service providers who could play a critical role in Bermuda’s future development, and 11 heads of funds of various types.

In addition to the 25 leaders of reinsurers we profiled in the last issue, it is because of these individuals that Bermuda punches well above its weight in terms of its economy and the quality of the people working there. A small island 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.

A full list of these leaders can be found on page 26 and a selection of their biographies and thoughts on the industry over the coming pages. It is important to stress that this cannot be a definitive list—these are the names that came up most during our informal inquiries. Our quest also focused on individuals who will shape the industry in the future.

A couple of key themes pervade their perspective on the market, the main one being that they believe Bermuda will remain central to the world of risk transfer as the industry evolves and changes.

Donald Kramer, the founder, chairman and managing partner of ILS Capital Management (he previously founded Ariel Reinsurance and was CEO of Tempest Re), describes Bermuda as the dominant reinsurance centre in the world and stresses that he believes it will retain this mantle as the risk transfer landscape continues to change.

Kramer gives a number of reasons for this. The first is that Bermuda has established a strong and knowledgeable government regulatory oversight department.

“It keeps the business safe and secure. In many other jurisdictions compliance has become excessively intrusive and overly expensive without necessarily improving results,” he says.

“The second is that Bermuda has become a centre for reinsurance talent, both imported executive talent and a large number of domestic employees and executives who have been well trained,” he explains.

He also stresses the importance of the geographic location of Bermuda with its proximity to the US and its direct flights to the UK.

He believes the biggest growth area for the Island in the future will be ILS, but warns of challenges ahead.

“The principal challenges are the global economy coupled with advanced technical knowledge. Certain risk areas will change while others will emerge. Interest rates do not seem likely to advance materially over the next several years, although a modest rise in rates seems inevitable,” Kramer says.

Frederick Pagnani Jr, chief executive officer of Mt. Logan Re, also believes that Bermuda will remain one of the leading global risk transfer markets for many years to come. As well as agreeing on the importance of its regulatory regime, he notes that it has a proven history of anticipatory and innovative product development.

“The Bermuda re/insurance market has also thrived in large part due to the entrepreneurial spirit the country has fostered through its pro-business regulatory environment,” he says.

He adds: “Bermuda has been at the forefront of product development since the early days of the country’s re/insurance market. This is largely due to its entrepreneurial spirit, on-Island technical underwriting capabilities and a legal and regulatory business environment that understands and supports the re/insurance market. I believe Bermuda will continue to evolve and remain the preferred location to conduct business as the global risk transfer landscape adapts and changes over time.”

Ernest Morrison, managing director and head of the corporate and commercial department at law firm Cox Hallett Wilkinson (CHW), stresses the enhanced reputation and credibility Bermuda has gained in recent years and the importance of this going forward as it copes with change and competition on several fronts.

“The hard work and collaborative efforts of the Bermuda government, the Bermuda Monetary Authority (BMA), industry leaders and agencies such as the Bermuda Business Development Agency have reinforced the perception that Bermuda is not just another offshore financial centre but is a stable, yet innovative, leader in the re/insurance and ILS sectors, with a proven track record and a credible regulator, as now demonstrated by Solvency II equivalence and by the designation by the US National Association of Insurance Commissioners of Bermuda as a ‘qualified’ jurisdiction,” Morrison says.

“The continuing development of new and innovative solutions for customers emanating from Bermuda is a function of the substantial depth of the intellectual capital present on the Island.”

He believes future growth and success will come from several sources, but especially ILS. But he also foresees some challenges ahead.

“We expect M&A activity in the reinsurance space will continue due to commercial pressure and the lack of organic growth options. Although it may slow down from the levels previously seen, we foresee that many companies will be looking at their options.

“In 2015, there were more than 20 major transactions, including the high profile acquisition by Exor of PartnerRe (CHW acted for Exor). While this transaction was an investment by a new player in the insurance space many, if not most, transactions will consolidate the market further leading to rationalisation of staff and the possible loss of expertise from the Island.”

And he finishes with a word of warning. “Bermuda cannot rest on its laurels. Increasing competition is inevitable from other jurisdictions that increasingly see the benefits of credible regulatory oversight and the attractiveness of the ILS market.”

Andre Perez, chief executive, Horseshoe Group, agrees, highlighting several other challenges.

“For Bermuda, standing still is never an option. The market is continuously in a state of flux and we need to adapt to those changes,” he says.

“The obvious one is the competition from other jurisdictions which are trying to emulate Bermuda’s success—this is especially true in the ILS space where there are now few jurisdictions around the globe offering a Solvency II-equivalent regulatory environment for ILS.

“One of the most significant challenges Bermuda is facing is the retention of talent. One of the pillars of our industry is talented people and I hope we find a way to retain them on the Island.”

Most admired

When we contacted and interviewed this batch of leaders, we also asked them if there were other leaders past or present they particularly admired for what they have done to help propel Bermuda to prominence as a risk transfer hub.

Brian Duperreault’s name again cropped up very often with Don Kramer, Ernest Morrison, of CHW and Mike Morrison of KPMG in Bermuda all naming him as a great leader.

“Brian has been a major contributor to the Island’s success and seems likely to continue to contribute with his focus on technology and his significant investment support from his major stockholder,” Kramer said.

Mike Morrison added: “Brian is a serial reinsurance executive who simply makes things happen—from growing ACE from a captive to a global powerhouse and restructuring MMC. We eagerly await what plans he and Kathleen Reardon have to develop Hamilton Re.”

Rick Pagnani at Mt. Logan Re named Bob Clements, an architect of both ACE and XL, and Steven Gluckstern. “The success of those companies propelled Bermuda forward and really put it on the face of the re/insurance map,” Pagnani said speaking of ACE and XL.

Of Gluckstern he added: “He took traditional reinsurance and infused it with capital market structures and led the way in the financial re/insurance sector. He was a real innovator and truly embodied the entrepreneurial spirit of the Island.”

Andre Perez said he had been inspired by Jim Stanard and the late Bill Riker, who helped form RenaissanceRe. “They single-handedly changed the face of catastrophe reinsurance and contributed immensely to making Bermuda the worldwide reinsurance centre it is today,” he said.

He added that Frank Majors and Greg Hagood, the founders of Nephila Capital, also deserved recognition for the way they sold catastrophe risk to institutional investors.

“What seemed like a crazy idea at the time ended up being a game-changer and gave birth to the ILS industry as we know it today,” Perez said.

“Last but certainly not least, a lot of Bermuda’s success is to be attributed to the amazing team at the Bermuda Monetary Authority (BMA), especially Jeremy Cox. Thanks to their relentless work to keep Bermuda relevant and responsive, they have helped the Island’s insurance industry build a solid reputation while allowing it the flexibility to thrive.”

Morrison at KPMG in Bermuda also named Cox, saying he had been “absolutely focused on achieving the BMA’s objectives—Solvency II equivalence being the key one”.

He also named Mike McGavick and Stephen Catlin for reinvigorating XL into a global powerhouse and their confidence in Bermuda is telling, with XL Catlin Group redomesticating from Ireland to Bermuda this year.

Finally, he named Dominic Silvester for leading Enstar to become the largest standalone run-off consolidator and now developing a significant live platform for the business.

Neil Horner at ASW Law named the late Bala Nadarajah, ASW’s first head of corporate and his mentor. “He is considered by us and many others in the Bermuda insurance industry as the man who helped lay the legal and regulatory groundwork for the Island’s rise as a leading global reinsurance centre. Jeremy Cox, CEO of the BMA, and all of his team have also done tremendous work in delivering Solvency II equivalence for Bermuda.”