From naval base to financial titan
Bermuda is known as Britain’s oldest colony, the imperial outpost which became a giant in its own right. But it also boasts perhaps the most unusual ‘origin story’ of any British imperial possession, past or present.
The Island may now be revered as one of the world’s leading financial hubs, but its original settlement was a complete fluke, its ‘pioneers’ a group of men searching for land more than 1,000 kilometres away from their home .
In 1609 British naval hero Sir George Somers and his ship, Sea Venture, were part of a mission to the newly discovered outpost of Jamestown in Virginia. They ran into a hurricane in the middle of the Atlantic and ended up crashing into a reef near a mysterious island, nowhere near any human settlement.
Miraculously, all 150 crew members survived. They scrambled for the island’s shores and spent the next 10 months there. Even though they eventually completed their mission to Jamestown, on a boat they’d built themselves from the original wreckage, they left a couple of people behind to ensure no-one else could snatch their prize away.
Thus Bermuda was born. From the outset, it was inextricably linked with the UK’s imperial exploration—not to mention the extreme weather conditions which would become a key specialism for its insurance industry.
Bermuda’s slow journey to becoming a global financial hub began in 1840, with the establishment of Bermuda Marine Assurance. However, if you had said the word “Bermuda” to the average man or woman in the streets of the City of London, they might not have known where it was, or why it was important. Some might have described it as an important naval base, and others might have known its place in Britain’s imperial history, but none would have described it as a financial centre. It would take a series of inspired decisions to realise this potential.
Beginnings of the boom
In 1947, the American International Company Limited Act was passed in Bermuda by the Island’s parliament, which allowed AIG (in its earliest form) to set up a subsidiary on the Island, the American International Company Limited (AICO). While other overseas companies had formed subsidiaries on the Island before, this was the first time that an insurance company had done so.
AIG came to Bermuda to benefit from its tax-free status, stable government and adherence to the British legal system. Other insurance companies followed to set up their own versions of AICO; the first reinsurer was formed there in 1948.
In the 1960s, another key marker was laid down. In 1963 Fred Reiss, the man credited with coining the term “captive”, formed a management company in Bermuda, International Risk Management. It was the beginning of the Island’s captive insurance boom, one that has shown no signs of slowing down, let alone ending, any time soon.
It’s worth remembering that while the concept is now a sound and popular one, at the time it was not—many insurers were hostile to the thought of corporations setting up captives as they thought they would lose business to such organisations.
Despite this, during the 1960s there was a steady increase in the number of captive insurers based in Bermuda. While insurers might not have liked the concept, large multinational companies did—and they sank a great deal of time, money and effort into it.
By 1971, an informal count suggested there were 150 captives in Bermuda. It was not always straightforward, as those firms discovered the pluses and minuses of owning a captive insurance company. On the whole, however, there was a steady rise in the number of such companies in the market.
According to AM Best’s July 2019 Captive Market Update, there are now more than 700 captive insurance companies on Bermuda, making it a significant player in the global market.
Bermuda used to have the largest number of captives in the world (more than 900), but in recent years that number has fallen, due to consolidation and companies using larger captives for greater risks, and to the increase in the number of jurisdictions which support captives.
The 1960s brought another significant milestone for Bermuda. Before 1963 there were no political parties on the Island and voting was largely restricted to property owners, effectively disenfranchising most of the population. In 1963 the vote was granted to all Bermudians over the age of 25.
In 1963 the Progressive Labour Party was formed and the following year the United Bermuda Party came into being. Both had very strong ideas on the economy of Bermuda and how to strengthen it.
In 1969 the Bermuda Monetary Authority (BMA) was founded on the Island, with the express intention of guiding its economy in a secure and stable manner and exploiting its potential.
It would be fair to say that, like Sir George Somers all those years ago, the Island has faced some choppy waters during the ensuing years, partly because of the impression that any jurisdiction that offers tax-exempt status for companies must in some way be fraudulent. It’s been a long fight for Bermuda to educate the world about the transparent nature of its taxes and maintain a clean reputation—a fight that continues today.
The country’s economic awakening since the 1960s has brought another challenge, and it’s one that still causes headaches. With so many captive insurers and other insurance companies arriving or being set up on the Island, who should staff the offices? Should expats come in and do the heavy lifting, or could local talent be nurtured and then promoted
It’s been a rather chicken-and-egg situation. Initially, at least, the local Bermudian population lacked experience in insurance, so expats were needed to plug the gaps, but over time, the debate has shifted. Bermudians who started at the bottom of the ladder have been promoted into much more senior roles.
The education system in Bermuda has improved dramatically, generating a steady stream of talented graduates to work in the financial sector, although getting the correct balance between overseas and local talent remains a significant issue.
Beginnings of real regulation
The issue of staffing may have problematic, but there was another challenge at hand. The world needed to realise that Bermuda was striving to regulate itself, and wasn’t simply going to become a tropical free-for-all where companies could do whatever they wanted.
In 1978 the Bermudian government passed the Insurance Act, in order to provide a basis for what was basically a self-regulating industry. The regulations under the act prescribe the form of statutory reporting, minimum capital and solvency ratios and other procedures to be followed in the conduct of insurance business on the Island.
The act set the bar for insurance regulation impressively high, and many other jurisdictions have followed Bermuda’s lead. As an insurance domicile Bermuda has been a trendsetter.
The legacy of Andrew
Following this regulatory breakthrough, different types of insurers and reinsurers arrived in Bermuda. Another significant milestone came in the mid-1980s, when a liability insurance crisis emerged in the US, characterised by rising insurance premiums and the unavailability of coverage in several parts of the market.
This was arguably the first time that Bermuda responded to such a crisis. A number of specialist excess liability insurers were formed on Bermuda including ACE, which moved from the Cayman Islands in 1985, and XL, which was formed the following year, initially on Barbados before also launching on Bermuda.
These two companies, formed in response to a specific need, became behemoths of the Island, establishing themselves on the global stage and employing thousands on Bermuda.
Since then, the rise of new formations has been the result of different factors. In 1992, Hurricane Andrew slammed into Florida and then Louisiana, inflicting $27.3 billion of insured losses according to PCS (in 2017 dollars). In the wake of Andrew, a wave of well-capitalised reinsurers were set up on Bermuda as the industry took advantage of what was suddenly a very hard market.
The number of entrants was such that the Bermudian government had to introduce the Insurance Amendment Act of 1995, which created a tiered system of regulation, which would recognise different rules and levels of oversight appropriate to the activities of the variety of companies domiciled in Bermuda.
This was prescient, because more followed in the early years of the next decade, as the market was rocked first in 2001 by 9/11 and then by the triple disaster of hurricanes Katrina, Rita and Wilma in 2005. Once again, the market hardened suddenly, and new reinsurers and fresh capital arrived on the Island.
Since then, Bermuda has experienced mixed fortunes. Both main parties have enjoyed periods of power and both have had to deal with the economic consequences of the 2007/8 financial crisis. Tourism, historically a profitable area for the Island, has declined, although recent efforts to restore the sector are bearing fruit.
Of late there has been a great deal of mergers and acquisitions activity in the re/insurance market, for a range of reasons, as well as a prolonged soft market that might now be coming to an end as rates stabilise in some places and rise in others.
In March 2019 the EU added Bermuda to its list of countries that had been blacklisted, based on the European Commission’s assessment of its tax transparency, good governance and real economic activity. Premier David Burt said that Bermuda’s appearance on the blacklist was caused by a case of human error on the Island when Bermuda’s draft regulations were being edited to avoid appearing on the blacklist, and by May Bermuda was removed from it again.
It was only a brief blip, but it goes to show how vigilant Bermuda needs to be to deal with any such damage to its reputation.
Throughout its history, buffeted by storms both literal and metaphorical, Bermuda has kept moving forward thanks to the vision and dedication of many individuals. Here, and in future issues of this publication, it is the efforts of these individuals that we will look to highlight and celebrate.