A symbiotic relationship
London and Bermuda: two risk transfer hubs separated by a vast ocean and different politics, currency and culture. They compete for re/insurance business on a regular basis but what is the real nature of their relationship? Could one do without the other, or are they unbreakably linked?
London has been at the heart of the insurance industry ever since the concept of insurance was initially discussed by men in periwigs in the coffee house that eventually became Lloyd’s of London.
Bermuda is a different creature. The UK’s oldest crown colony became a re/insurance hub quite late in its history, as various governments worked to encourage re/insurers and captive insurance companies to the Island.
Both are always looking for business and both will stress their advantages over other places. But at the same time, in a world where the boundaries between businesses continue to blur as necessity and technology drive them together, they need each other.
Catherine Thomas, senior director, analytics at AM Best, believes that Bermuda and the London Market are competing hubs, particularly in the reinsurance sector, but they also complement each other. The number of insurance groups that have material operations in both markets continues to grow.
“Since 2001 especially, a number of traditional London Market businesses have established alternative platforms in Bermuda, citing tax and regulatory reasons, in addition to access to business,”
“Over the same period, many Bermudian insurance groups have purchased Lloyd’s operations, and during 2016, the Bermudian insurance industry provided 14 percent of Lloyd’s overall capacity.”
Mark Van Slooten, co-head of Aon Benfield’s market analysis team, agrees that Bermuda is important to the London Market.
“If you stand back you’ve basically got two underwriting centres and they’re used in very different ways,” says Van Slooten. “The London Market obviously has a lot of history and traditional strength in certain areas, so I would say in terms of broad access to global business, it’s very difficult to rival the London Market.
“Bermuda has carved out a significant position in the global reinsurance market, particularly in the cat market. The tax advantages of the domicile have certainly had a big part to play. Historically, post-loss Bermuda has been able to attract a good share of the new capital that has looked to play in this industry. The traditional strengths in terms of proximity to the US market are something that will continue to play out going forward.”
Van Slooten says that from the point of view of London Market players, or Lloyd’s syndicates, a number have set up underwriting platforms in Bermuda, precisely because of that proximity to the US market.
Around 10 years ago companies such as Amlin and Hiscox set up underwriting platforms in Bermuda, followed by a number of medium-sized Lloyd’s syndicates that have now established service companies so that they’re writing largely US business, by the syndicates, under binding authorities and coverholder arrangements.
According to Van Slooten it’s all about the recognition that Bermuda is a thriving marketplace and that if you want to be a significant participant in US reinsurance business then having a presence on the ground on Bermuda makes a lot of sense.
A ticket to London
On the other hand, companies need global diversification in the
re/insurance industry and whether you’re in Bermuda or anywhere else in the world, if you want good access to business and instant diversification, having a vehicle in the London Market makes a lot of sense.
“That’s why a lot of those groups that were formed on Bermuda
have since established Lloyd’s operations and they have a strong presence in London, because that gives them access to global business,” says Van Slooten.
“For Bermuda, the London Market is all about global access to business, while from the London Market’s perspective, Bermuda is all about access to the US market.”
“The Bermuda marketplace is optimistic about all the mutually beneficial links we have with London. Our markets complement each other significantly on the re/insurance front; one only needs to look at the amount of capacity Bermuda companies supply to Lloyd’s of London,” says Jereme Ramsay of the Bermuda Business Development Agency (BDA). “We’re exploring ways we can develop the same synergy in other industry sectors.”
‘London’ is something of a catch-all phrase and includes Lloyd’s of London. Lloyd’s is a rather more specific and specialised area of the market but there are major overlaps between the two.
According to Dermot O’Donohoe, CEO of Hamilton’s Lloyd’s operations, in some ways, Bermuda and Lloyd’s are competitors but in other, the markets are complementary. The stronger, more efficient and more innovative both markets are, the more relevance they represent to the global insurance and reinsurance industry.
“The relationship is, in many ways, symbiotic: insurance and reinsurance companies based in Bermuda provide one third of the capital to Lloyd’s syndicates. This capitalisation has made a significant difference in Lloyd’s ability to survive and thrive in various market cycles,” he says.
O’Donohoe also points out that Bermuda companies provide significant reinsurance capacity to UK insurers, according to the Prudential Regulation Authority and the Bermuda Monetary Authority. Many companies have platforms in Bermuda and at Lloyd’s, the former allowing them to gain access to business that wouldn’t find its way to the Lloyd’s market.
A complex marriage
Lloyd’s iconic brand, access to global licences, capital efficiency and ratings make the market very attractive to Bermuda insurers and reinsurers.
However the past year has seen the relationship between Bermuda and London further complicated by a new and potentially extremely disruptive development: Brexit.
The exact nature of what the UK’s departure from the EU will mean is still to be thrashed out. So far negotiations have been tentative and not particularly informative as to what will eventually emerge in terms of the implications for the re/insurance industry. As Bermuda has so many links to both London and Europe, the Brexit negotiations are being closely watched by many in government offices in Hamilton.
According to O’Donohoe, Brexit has somewhat diminished Lloyd’s attractiveness because of ongoing uncertainty regarding the manner in which the UK will exit the EU, and the impact of potential legislative and regulatory changes.
“The best-case scenario would be that the status quo is maintained,” he says. “Under the worst-case scenario another regulatory body would be established, resulting in the additional cost that a European Lloyd’s vehicle may add to an already expensive platform (Lloyd’s).”
AM Best’s Thomas agrees that the relationship between the two markets could be complicated by Brexit. She points out that given the importance of European markets to Bermudian re/insurers, including the London Market, the Bermuda Monetary Authority (BMA) worked hard to achieve Solvency II equivalence. Consequently, the EU recognises the BMA as a group supervisor and Bermudian companies benefit from cross-border reinsurance market access across the EU. Post-Brexit, the BMA will need to negotiate separately with the UK if it is to maintain current arrangements.
Thomas says that this will be important in respect of maintaining access to business emanating from the UK and, for Bermudian groups with a UK subsidiary, minimising their regulatory burden.
“Any change to the UK’s regulatory or tax regimes post-Brexit could also have an impact on its competitive position versus that of Bermuda,” Thomas concludes. “The recent publication of regulations designed to introduce a competitive regulatory and tax regime for ILS in the UK is an example of this.
“Other considerations that may influence the relationship between the two markets include the shape of any trade deal between the
EU and the UK, and whether the UK is considered to have
Solvency II equivalence.”
Van Slooten says that Brexit is going to impact the way the London Market writes European insurance business, and that’s where the primary impact is going to be felt.
“If you look at what Lloyd’s is saying, for example, the loss of passporting rights—if that happens—will affect about 5 percent of Lloyd’s business, and that’s why Lloyd’s is establishing a company in Brussels, because they want to maintain access to that business and they want to show continued commitment to the European market. We’ve seen a number of other groups doing the same thing,” says Van Slooten.
“Most lines of reinsurance business won’t actually get caught by loss of access to the single market, so we’re not expecting there to be a huge disruptive effect on the reinsurance side—it’s more of an insurance issue.”
Van Slooten points out that the groups that are established in Bermuda will typically be accessing the European market through existing operations in London, and if they want to maintain access to that business and they don’t currently have a presence on the European Continent they will need either to sign up to the Lloyd’s-Brussels arrangement or to establish themselves on the Continent—and most of the big groups already have capital in Europe.
“Assuming there is some sort of ‘hard’ Brexit with the loss of passporting rights, this is something that the industry as a whole can cope with, but it’s adding cost to the industry at a time when frankly it doesn’t want to be adding any cost at all,” Van Slooten sums up. “We need to be taking cost out of the system, not adding it. Brexit is very unhelpful from that perspective.”
In the meantime, despite all the uncertainty, business goes on as normal.
This autumn, the BDA will lead a delegation of industry experts to London to host an executive forum promoting a variety of Bermuda financial and risk solutions. The November 28 forum will feature experts from Bermuda’s re/insurance, captive, asset management, convergence/ILS, trust and private-client sectors. According to the BDA the multidisciplinary focus will convey a message of Bermuda’s many advantages and areas of expertise.
“Bermuda attained Solvency II equivalence last year and has seen an increase in inquiries out the UK and Europe regarding our product offerings. This is an opportunity for the Bermuda market to showcase our stable, top-tier jurisdiction, which is attractive to business involved across all financial services and international trade,” Ramsay says.
With Lloyd’s of London deputy chair/Hiscox chair Robert Childs as keynote speaker, the BDA-led delegation will also include government and regulatory officials, and representatives from key industry associations. These include the Association of Bermuda Insurers & Reinsurers, Bermuda Insurance Management Association, the Bermuda Stock Exchange, ILS Bermuda, and the Bermuda branch of the Alternative Investment Management Association.
In this way Bermuda is making sure that its presence continues to be felt in London.