Bermuda and international broking: punching above its weight
Strength in depth
Bermuda Re provides an indication of the depth of experience Bermuda brokers bring to the table.
Paul Markey is the chairman of Aon Group (Bermuda) Ltd, Aon (Bermuda) Ltd and of Aon Benfield Bermuda. Aon’s Bermuda businesses assist global clients in finding large capacity solutions for corporate risks and reinsurance in areas such as property, marine and energy risks.
• All territories and business lines
Julia Mather has worked in the insurance industry since 1997 and in Bermuda since 2003 when she became head of Miller Bermuda Limited, based in Hamilton. She works closely with her Europe and Asia-based colleagues to facilitate the placing of a wide variety of covers into the Bermuda market.
• Property and casualty
• Worldwide specialty lines
Christopher Reeves a managing director of Marsh Inc and president and chief operating officer of Bowring Marsh (Bermuda) Ltd.
• All territories and business lines
Charlie Withers-Clarke is executive vice president and branch manager of Willis Re Bermuda Limited. His main responsibility is developing business from Bermuda-domiciled companies and managing inward business into the Bermuda reinsurance market.
• Aerospace, marine and energy
• Property retro
Which lines and geographies of business play to the Bermuda market’s greatest strengths and which lines does Bermuda dominate?
Withers-Clarke: Bermuda will continue to be a dominant force in the North American property catastrophe business. The proximity to the US gives the Island a big advantage with regard to time zones and the convenience of North American client visits. We currently place US cat business with 34 counterparties in Bermuda, and organising 25 plus meetings over a three-day period is something we do regularly. It would be difficult for rival markets to match the concentration of capital and talent.
Mather: Bermuda dominates anything which has a cat element to it, and in terms of geography, it would be the US more than anywhere else. The traditional Bermuda model provides big chunks of capacity on low-frequency and high-severity events, hence the predominance of cat lines business.
"Bermuda came to the fore with two main specialties-- casualty and property cat-- and certainly that is where its strengths still lie."
That is why it has traditionally been a casualty and property catastrophe market. I think that this still holds true today—as the market softens, business goes back to its original stomping ground. So, for example, North American direct property returns to the US, and London targets less run-of-the-mill risks. Bermuda came to the fore with two main specialties—casualty and property cat—and certainly that is where its strengths still lie.
Markey: Bermuda remains a specialist market for certain types of business. It is a leader in all aspect of captives, in high-severity, lowfrequency insurance products, and also for property catastrophe reinsurance business. These three areas are dominant leadership positions, but the market itself has expanded considerably in general over the past decade. North American business dominates all three categories, but Bermuda has a global position as a market for all its business.
Reeves: Bermuda specialises in three main insurance product areas: excess casualty, financial lines—such as directors’ and officers’ (D&O), employment practices liability (EPL), errors and omissions (E&O)— and property.
The Bermuda market specialises in providing significant coverage limits for US-based risks for Fortune 500-size companies and is best suited to risks with a low-frequency/high-severity catastrophe profile.
In excess casualty, insureds are likely to be in high hazard industries such as chemicals, life science, transportation, energy and utilities. Financial lines coverage tends mainly to be EPL for major employers, D&O for Fortune 500 companies, E&O and D&O cover financial institutions and E&O for law and accounting firms.
For property lines, coverage can be found for accounts with heavy catastrophe exposures, including those with significant locations exposed to California earthquake or Tier 1 windstorm, as these tend to be the best fit for the carriers’ capital models. Insureds tend to be retail, real estate or hospitality companies, or financial institutions.
How is the market looking to diversify away from North American risks? Which geographies and lines are attracting the most interest outside North America?
Markey: In order to service relationships and business that could be defined as ‘local’, it is pretty much a prerequisite for companies to be represented in major territories and regions. It remains attractive for Bermuda companies to seek distribution channels for Europe, the Asia-Pacific, the Middle East and the BRIC regions. Diversification is always going to be a direction for Bermuda companies to pursue, always tempered however by ROI constraints, costs, etc.
Reeves: In response to the high levels of capacity for US domestic risks, Bermudian insurers have increased their interest in risks in other parts of the world. They are largely doing this by expanding their global office network rather than through their Bermuda platform. This geographical diversity helps to offset the Bermudian-written US catastrophic books of business.
Withers-Clarke: Due to the relative size of the European and Japanese economies, Bermuda will always write significant volumes of property premium in these territories. Outside of property cat, our Willis Re Bermuda portfolio is made up of 15 different lines of business and we are continuously working to introduce Bermudian companies to new lines of business from our Global Willis Re network. This year, we completed deals in lines as diverse as pet insurance and a satellite’s failure to operate in space.
Our non-US premium volumes have grown year-on-year since Willis Re was set up in Bermuda, underlining Bermuda reinsurers’ quest for diversified lines. In 2009, our international premium flow increased by 20 percent and, in 2010, we managed to gain organic growth in international premiums placed, and this was in spite of a decent headwind of increased retentions and rate reductions.
A number of Bermudian reinsurers have created or purchased Lloyd’s syndicates, with the Lloyd’s franchise offering excellent wholesale diversification opportunities in both the reinsurance and insurance markets.
Mather: Looking at the way that the Bermuda market has grown over the last 10 years, you can see that companies initially set up here because it is relatively quick and easy to do so. Many started off by offering diverse lines of business here in Bermuda, so at one stage, we were able to place almost anything here, in fact every team within Miller had business placed into the Bermuda market. As time has gone by, companies have developed geographically by opening platforms in areas such as Lloyd’s, Singapore, Brazil and Switzerland.
As a result, the Bermudian companies have gone back to writing their core business in Bermuda—so companies are still writing the business here, but also have the opportunity to take it closer to where the actual risk is geographically.
With which markets has Bermuda forged the strongest links and do you foresee new geographical partners emerging in the coming years?
Reeves: In excess liability and financial lines, Bermuda tends to have the greatest commonality of clients and appetite with the North American market. Many Bermudian carriers also have US platforms, providing links to this market. Client links to the US are also strong in property lines and the subscription nature of most direct property placements ensures links with all global markets, including London and continental Europe.
Mather: There are many companies headquartered here in Bermuda and as a means of diversification, they have opened up offices in lots of different places, so there is an element of growth in a number of directions.
"A key strength of Bermudian marketplace has been the ability to provide significant capacity and to quickly develop and bring to market new products."
There are a number of insurance hotspots around the world and Bermuda is certainly still one of them, which is why you have a number of companies which originated elsewhere also moving to Bermuda—it’s not just one-way traffic. People talk about the threat of jurisdictions such as Switzerland, but I don’t think that these are a threat to Bermuda, just that Bermuda has its place and, for some companies, Switzerland has its place. All it means is that the distribution of where business is placed has changed—it is still the same companies writing it. Culturally, this makes much more sense.
Markey: Lloyd’s, Europe, Japan and Australia have been the most immediate geographies, and while it will be important for Bermuda to continue to maintain the excellent relationships it enjoys with each of these markets, establishing good traction with the BRIC regions is a long-term goal in today’s world.
Withers-Clarke: London has had a long-standing relationship with the Bermuda market, which is in part due to the volume of reinsurance purchased by Lloyd’s. The trading relationship has been enhanced by a number of Bermudian companies setting up offices in London in order to tap into the wider broker market, and we have also seen a number of London operations redomiciling to Bermuda and writing North American business from here.
Japanese renewals will see more than 20 Bermudian companies sending international underwriters to Tokyo in the first quarter. Bermuda has significant additional capacity for Japanese wind and earthquake, but pricing has dictated that this is not currently deployed.
Southeast Asia offers considerable growth potential, but the emergence of Singapore as a market has drawn a number of reinsurers, including Bermudians, to set up operations on the Malay Peninsula. Accordingly, Bermuda will indirectly receive premiums from this area, but the bulk of the underwriting will be out of Singapore.
Which lines are showing the most significant movement— upwards or downwards—at present and what are the major pressures?
Markey: Our sense is that energy-related business is showing immediate upward demand and rate increases. Otherwise, supply stillexceeds demand in most insurance and reinsurance areas, so technical rates are either still falling or at best are stable. Generally, lines that have recent, actual loss deficits are beginning to see pressure. Expectations for upward change in 2011 are modest at this point, until the capital/capacity/demand cycle balances out.
Reinsurers have the organisation and intellectual capital to be able to move rapidly to deploy capacity into distressed lines when rates harden, and this dampens the upward momentum of rates.
Mather: There are many areas of the market that could be analysed here and they all face different pressures. Examples would include offshore energy, which as you can imagine, is up 30 to 40 percent and property treaty, which on the one hand has seen a number of earthquakes and other natural catastrophes and on the other is coming under close scrutiny following the release of RMS version 11.
Some companies are too concerned about losing market share, whereas they should be more interested in the margins—and not just in Bermuda, but in general. For example, over the last couple of years, the casualty market has been hit because people were expecting the rates to go up—and then we saw several start-ups adding to the availability of capacity and this stopped the rates from doing anything. There has been a slight correction here with Torus closing down its Bermuda casualty team. In terms of the Gulf of Mexico and the offshore oil and gas industry, I think that there is a slight impasse in the market, because clients are simply not willing to pay the prices which the underwriters need in order to write the business. I get the impression that underwriters were taken a little bit by surprise in terms of where their clashes were on Deepwater Horizon—so they are all reviewing how they write these sorts of risks.
Reeves: Rate reductions on cat-exposed, direct property accounts have slowed considerably in the recent past to the point whereby average rating is now flat. However, only time will tell regarding the lasting affects of the well-publicised property catastrophe losses in Q1 2011 on the direct property market. The excess casualty market is generally stable at present; however, the energy and utility sectors have recently experienced significant loss activity, especially in the pipeline and off-shore drilling areas, consequently these areas are seeing hardening pricing and terms. In financial lines, D&O— particularly commercial D&O accounts—are still showing the largest rate reductions due to abundant capacity.
The market for financial institutions has become more stable following significant recent increases; however, even in this industry segment, there is a surplus of capacity. What are the major challenges facing the Bermuda market and how are brokers looking to head down these issues?
Withers-Clarke: The major issue of US tax regulation is somewhat out of the brokers’ hands, but the Association of Bermuda Insurers and Reinsurers (ABIR) has done a good job of raising awareness of the potential consequences of the Neal Bill.
The entire insurance and reinsurance market is in the midst of a softening market and Bermuda is no exception. As brokers, our role in the Bermuda market is to continue to grow premium inflow across multiple lines of business and to find reinsurance solutions that help our clients throughout every stage of the market.
Reeves: Global overcapacity exists in many industry sectors and product lines, which offers a great deal of choice for clients. From a Bermudian carrier perspective, global portfolio diversification strategies at the corporate level often involve platforms other than Bermuda and, indeed, Bermuda’s exclusivity regarding ‘signature’ products has been eroded as these are now regularly replicated onshore.
For many years, a key strength of the Bermudian marketplace has been the ability to provide significant capacity and to quickly develop and bring to market new products. Examples include the development of employment practices liability coverage, significant coverage advances in Side A D&O, the development of the occurrences reported casualty form and its unique coverage grants, and the development of pandemic and nuclear, chemical, biological and radiological (NCBR) coverage within the property market.
Today, Bermuda’s brokers are encouraging carriers to offer an increasing variety of client solutions and to diversify by expanding their suite of complementary products in order to maintain and grow gross written premium. Enhancements to products recall coverage and the development of a market for trade credit risk are both examples of this.
Mather: The main challenge for the Bermuda market is the market cycle. Bermuda traditionally fairs very well in a hard market and quietens down in a soft market, which goes back to people not being prepared to follow the market down.
From a broking perspective, Miller adopted a different view from other companies, which is why we set up a representative office rather than a transactional hub. I am seeing other brokers with transactional offices having to make redundancies or simply not replacing employees when they leave. The way Miller has approached things is to make sure all of our people in London use the Bermuda market as and when they need to, and the role of the office is to ensure that we stay fully in touch with the market. This offers our clients continuity of service and a single point of contact. We look at the placement first and make use of whichever markets are best suited. It is a collaborative effort that seeks our best options for the client from the worldwide insurance markets.
Markey: Ensuring that Bermuda remains an efficient and reliable partner in the global market is critically important. A comprehensive effort is required in this regard, and 2011 is a critical year in providing strong evidence of a complete buy-in by all constituent partners.