Securing the population’s future
Tighter regulations for life and annuity re/insurance will stand Bermuda in good stead, said six leaders of the sector in a discussion sponsored and hosted by BILTIR.
Can you describe the size and state of the long term re/insurance market?
Natasha Scotland Courcy: The Bermuda Monetary Authority (BMA) has said the life sector in Bermuda has over $1 trillion in assets under management. But to me, it’s not so much about the growth but why the market is the way it is now. You’re seeing new entrants, more licensed registrants and growth in assets undermanagement.
You have to start with the protection gap. According to the OECD, we are at about $1 trillion per annum—that’s the shortfall relative to how much money is going to be needed to support retirees, and that number is growing. So that’s the market need and that’s the purpose of our businesses and where Bermuda has come into play.
The misapprehension is that growth in Bermuda specifically revolves around some kind of capital arbitration, but that’s not why companies are coming to Bermuda. Because of this growing protection gap, there is a need for re/insurers in the life sector to service those policyholders, to help to protect their pensions and to provide capital relief for the insurers that need to services retirees.
That’s why we’re here, because of this growing gap. We have put out a whitepaper that summarised some key metrics that help to explain how we’re helping to support that, and how we’re doing so safely with prudent capital standards and prudent investment strategies. We want to clarify some misperceptions in terms of what assets are sitting on balance sheets to support these retirement needs.
According to the data that we gathered, 70 percent of our licensed members have a credit rating of A minus or above. That speaks to the strength of the balance sheets as well as the fact that 92 percent of the assets sitting on these Bermuda balance sheets are investment-grade assets. Bonds and debentures make up 59 percent of that.
That emphasises that we are prudently managing policyholder balances by backing them up with assets that are strong and protected, and have their own governance around how they’re meant to be managed.
It may seem like a big number, and it may seem that Bermuda is a small island. People will ask: “how have you had all these new, licensed entities pop up in a short space of time?”. The answer is that when there are opportunities in the market, there will be growth. That’s naturally part of a market cycle.
Bermuda is able to capitalise on it prudently through a very strong regulator. The growth has been supported by responsible entrants that are generally doing the right things and are supported by a strong regulatory framework.
Suzanne Williams-Charles: With respect to capital arbitrage, it’s important to highlight that over the last year to 18 months, the BMA has undergone significant enhancements to its regime, and the bulk of the enhancements touched the life sector. The result of that was that existing players had to raise additional capital to continue to meet the requirements of the regime, or they were well-capitalised enough to absorb the changes.
It’s important to recognise that we’ve had new entrants into the market, even with this regime being put in place, which talks to the quality of companies that want to come here. If companies were coming here for arbitrage, they would have looked at these
enhancements and said, maybe this is not the jurisdiction for me. But they still decided to set up shop here.
Why has Bermuda been the home of this market, rather than New York or London?
Sylvia Oliveira: I moved to Bermuda in 1999 with the first life monoline reinsurer startup. We were one of the few life companies here, and since then several more companies have followed suit. One of the main attractions of Bermuda is the robust framework that the regulators have put in place. Companies want to be domiciled somewhere that’s secure and protected, so that our policyholders feel secure and protected.
In Bermuda, the economic balance sheet aligns exactly with how companies want to manage their business to best protect policyholders. The framework is based on the true underlying economics and the true risks of the liabilities and the assets, such that the capital held is appropriate.
These coverages are for very long-dated liabilities. The assets backing these liabilities are very safe, but the maximum maturity is generally 30 years. This creates reinvestment risk, and life companies must manage that risk. They have to utilise prudent reinvestment rate assumptions, and there has to be an ability to hedge this risk. In a scenario where rates go down, and in the extreme Japan scenario where rates stay down, companies must have hedges in place to cover that event.
The regime in Bermuda allows us to account for these hedges in an appropriate and economic manner. That’s very attractive to companies.
Can the long-term investments absorb more ups and downs than if you were looking at liabilities with a much shorter timeline?
Oliveira: Yes. We generally talk about “held to maturity”, meaning companies are holding these assets for the long term. As rates fluctuate, companies can ride out the ups and downs since the assets are generally held to maturity so will retain their full value. Default risk is addressed by the high credit quality of the underlying assets, and there have been very few defaults historically in our industry.
Part of the capital enhancements raised by Suzanne earlier serve to address the default and downgrade risks by making the assumptions even more conservative.
Sarah Demerling: It shows the experience on-Island that the BMA has. They are regulating because of the experience they’ve been gathering over time, and the fact that there are so many members with real-time examples with the data that supports them. We’re not coming to market just because we see an opportunity.
The market has evolved. We’re growing with it and we’re making sure that the regulation is robust and sustainable. The reason that new entrants are coming here is that they see this as a longer-term play. It’s very flexible and risk-based, which is not one size fits all, but is proportionate to size, whether it’s startups or larger players.
Alison, the protection gap is something that you deal with every day. How do these issues apply?
Alison Hill: In Bermuda, we have a high cost of living, a small and ageing population, a high prevalence of chronic disease and dependency on overseas healthcare. When you take all that together, it means that Bermuda’s protection challenges are acute. If you retire at 65, you need about $1.2 million in your pension pot in order to fund a sustainable lifestyle and rising healthcare costs. That number is about $1.1 million in the US. We are seeing many people retire with pensions pots that are substantially below that number, despite their having contributed into a mandated private pension for many years.
We need better financial education so people are aware they have this huge deficit to fund. As a territory, we spend approximately $800 million on healthcare every year for around 63,000 people, and 50% of that is spent overseas. This makes it very difficult to retire in Bermuda. When it comes to retirement readiness, you have to think more broadly about how you save, how you invest and how you have both active and passive income. You need a much more diverse portfolio of income into retirement.
We’re working with government at the moment as an industry, evaluating lots of ideas to address this issue.
Because healthcare costs are such a high component of retirement funding, we are introducing improvements in the preventive/early diagnostic space. If you’re one of our clients, we waive co-pays at our doctors’ offices, because we want to encourage our insureds to get checked. Having integrated care management means we are focused on coordinated care, to drive down healthcare costs without compromising on the quality of medical outcomes.
We have an overseas care network and are achieving meaningful discounts on the quoted overseas care rates, in the same facility, with the same physician, for the same procedure. We are also evaluating ways of redirecting care back on-Island.
But we are not saving enough. Our job is to encourage people to save more, to build scale in our pension business and to leverage that scale to reduce fees and improve investment returns.
There is a whole range of things we can do to address the pensions because the current situation is not sustainable.
What can reinsurers do for primary insurance, not just for Argus or Bermuda, to solve the problem?
Oliveira: There are some innovative life products. An interesting one is whole life combined with a long-term care provision. So if your heirs take care of you, and you don’t use the long-term care benefits, there’s more value remaining for their inheritance.
Scotland Courcy: I want to build on what Sylvia was saying in terms of what Bermuda offers and to provide a baseline. Bermuda did not get here overnight. This market has developed over decades upon decades. The first insurance company set up here was in 1840, and The Insurance Act came into play in 1978. So this industry is a seasoned, mature market with a framework that’s been in existence since 1840. People can trust that this is not an overnight market.
On top of that, Bermuda has NAIC reciprocal status, and the regime has to stand up to the tests of global regulators to maintain that. We also have EU Solvency II equivalence, and that was reaffirmed last year, so the framework itself has been recognised internationally.
The third point is that the scrutiny a company in Bermuda faces from its regulators globally is constantly increasing. You can’t hide anything insofar as it pertains to what a Bermuda insurer is doing to protect policyholders in Bermuda, because the regulators are speaking to each other more and more. Policyholders, cedants, and regulators, wherever they’re located, want to speak to the regulator where that liability ultimately ends up. If the total asset requirement does not match, we’re all going to know.
Ahwaz Chagani: Even though Bermuda has a reciprocal jurisdiction status with the US, a lot of the business reinsured in Bermuda is done on a collateralised basis. So a lot of those funds sit on the balance sheet of the cedents as collateral, and that is invested in accordance with the investment guidelines agreed with the cedent. You agree on the kind of assets you will invest in with the cedant and you agree on the ALM that Sylvia spoke about.
I think there are other secondary reasons as well, in terms of establishing credibility of the jurisdiction. Aside from the strength of the regulation, the economic balance sheet, the international recognition of solvency, this is also a safe and secure place. There is rule of law, there is order. That plays a huge part in terms of providing credibility, to be able to raise capital, which will be invested in Bermuda, because ultimately, it's the capital that provides reinsurance capacity.
One of the things that is looked at when we are negotiating reinsurance transactions is the law that will govern the treaty. Typically, it is US, Bermuda or UK law. Now that's changing a little bit with Asia. But, Bermuda is up there and that speaks to the credibility of the jurisdiction.
Williams-Charles: I have been traveling internationally and it’s important to acknowledge that just because Bermuda has been scrutinised does not necessarily mean that there is a concern with the BMA. It’s normal and expected for the UK or Europe or the US to protect their own policyholders and make sure that things are done in an appropriate way and that the framework is robust.
I have had conversations with international regulators over the last month, and no-one spoke in a disparaging way about the framework here. Everybody spoke about the reputation of the BMA, that it is a world-class jurisdiction and the framework is robust. I even experienced comments around the talent the BMA has recruited and the expertise of staff. Just being scrutinised doesn’t necessarily mean something’s wrong.
If something happens or something’s changing in the jurisdiction, people want to know what’s going on so they can make sure they’re not missing something.
Oliveira: The BMA has been ahead of some other jurisdictions in some areas. In terms of assets, the BMA is calling for pre-approval of all structured assets and is requiring submission of very detailed information supporting the collateral of those assets. The US has recently initiated a similar project, so Bermuda is aligned with the US in that respect.
Demerling: It is very sensible that the BMA is not scared to take decisions that have to be made, even if it might not be a popular choice. But there was a huge amount of industry stakeholder input to get to that point. As you say, some of it is reactive to the market growing so quickly, but a lot is pre-emptive to make sure we’re staying ahead of where we need to be.
Suzanne, how helpful is it for the life sector that the P&C reinsurance industry has already been down this track in Bermuda, with scepticism from regulators and tax questions?
Williams-Charles: Lessons have been learned. The BMA and the Bermuda government have been through this. The relationship between the government, the regulator and the market in Bermuda is a unique one. There is appropriate separation between each, because you have to have your independence as a regulator, and the government has to make decisions based on what’s good for the country and can’t necessarily be swayed by other things.
But there’s an understanding of the importance of international business and specifically, the reinsurance sector in Bermuda, so there is an acknowledgement that we need to work together on some level and share information to make sure that everybody’s making decisions in the right way.
You saw that in the life sector’s support for the BMA’s changes and the way the government worked with the regulator to make sure that the legislation was prioritised in an appropriate manner. All of those things are important and unique. In the US and the European legal systems, the process of taking things from an idea to enacting legislation is quite lengthy. We don’t have the luxury of that in Bermuda, because we have to be quite nimble.
Those things are very important to the jurisdiction and are part of the attraction—that we can adjust to international scrutiny and to changes in our framework much more quickly than others, not just because of the legal system, but also because the market recognises the importance of maintaining this jurisdiction, keeping us in line with international standards, and having a world-class jurisdiction.
Sometimes that overrides the impact, potentially even financially. There were significant changes, but companies realise that this is the place they need to be, because the alternative was going to a jurisdiction that potentially does not have the same reputation as Bermuda.
Scotland Courcy: With success, you can sometimes become complacent. The Bermuda market is the opposite of that. Some of that is because we’re responding to international scrutiny. Over the course of the 17 years I have been here, we have adapted and absorbed Solvency II and economic substance, and we’ve made a Corporate Income Tax.
We’ve had to absorb beneficial ownership changes and the big regulatory changes we just underwent on the life side. That’s a strong indicator of how this market is able to deal with the headwinds head on—we’re not avoiding any of these conversations.
We were aware there should be transparency around tax and we’ve implemented our own regime as it pertained to that. As an industry, all the principals involved, the companies themselves, the government and the regulator, the key stakeholders are committed to making sure we’re able to pivot when required.
These headwinds won’t go away. That’s just part and parcel of being a tiny island in the middle of the Atlantic that has massive amounts of liabilities and assets under management. I’m confident that more will come, but we are very well-positioned as a jurisdiction to manage them. We have a history of doing it.
Hill: I’m interested in what the territory can do—over and above changes to regulation—to grow and remove some of the barriers for companies to set up offices here. What are some of the things that the community and territory can do to assist in delivering on that goal?
Oliveira: We have launched Actuaries of Bermuda. One of our mandates is to work with Bermuda College and the local high schools to encourage local talent to enter the actuarial profession. BILTIR has also been doing this work with local schools for many years. Life companies’ preference is to hire locally whenever possible.
Life Career Expo and we have been joined by BILTIR members. The goal goes beyond actuarial science, and we are attracting students and career-shifters. We have developed a workshop programme for people who have no experience in the life sector at all. You work shadow for a week and see what the life sector is like and what jobs are available to you. More of that is being used to develop local talent and to give Bermudians an opportunity.
Our goal is to educate communities about the opportunities. They should be able to take their seat at the table. We are in lockstep with the Minister of Immigration, we’re constantly talking about things we need to help support our industry. Obviously, we need experts as part of this journey with us, but we are all very much committed to giving Bermudians an opportunity and a seat at the table.
Oliveira: Going back to the fact that we are the long-term sector, that plays a role in our culture. Our companies want to be domiciled in a country that is stable, and we want to employ Bermudians, and to close gaps as much as possible.
Scotland Courcy: The infrastructure is where we’re challenged. Everybody agrees we need to see some infrastructure development because people come in and look for places to live.
Chagani: Long term retention of people is also an issue. You can bring people in, but after a certain number of years, there’s uncertainty, there's uncertainty about permanent residency status, there's uncertainty about what happens to their children when they grow up.
So all those things play a role in terms of how the sector develops. I think also important is the medical infrastructure, when somebody makes a decision to come to Bermuda, in addition to the safety, security, and remuneration, candidates also look at access to healthcare.
Hill: We’re very aware of that. You have to provide quality and choice. If you have a major medical condition, people must feel confident they can access the care they need in a timely manner.
Scotland Courcy: Some pluses are that it’s easy to get to different places from Bermuda, but we have seasonal flights, and it’s been a struggle in terms of connectivity to key markets. I am happy to see BermudAir—I hope it succeeds. But as a market we need to get where we need to quickly. We also need facilities for conferences.
How annoying is it to hear that Bermuda can’t be well-regulated because it’s a small island?
Scotland Courcy: It’s hard not to get frustrated when you see those articles, some of which are misinformation. People who don’t understand the framework, don’t understand our businesses. The property and casualty story is easy to tell in that your house was blown away or there’s a fire or a bridge has collapsed and Bermuda was able to support the losses.
On our side, it’s more complicated in terms of where someone’s pension has ended up. Depending on how the contracts work, all the securities and provisions that are in place, the pension group is protected at the end of the day.
But it’s a scarier, harder story to tell the average person because they’re not seeing the immediate benefit right away. That’s part of our job. That’s why we’re putting out the whitepaper where we continue to advocate so the ultimate policyholder isn’t scared of the notion and they understand why ultimately, this is a benefit for them.
It’s an ongoing exercise to demystify what we’re doing, rather than other people telling the story for us.
Demerling: It’s about us controlling the narrative, rather than other people telling the story for us. We have to make sure we are on the road, and in all the key jurisdictions in the US, UK and Europe. We’re not complacent, but we have to keep reiterating the message and providing data to support it.
Williams-Charles: We have to remember that this is business and competition. Other jurisdictions benefit from Bermuda not being seen in a positive light. There are a lot of complexities, but ultimately it is as simple as competition. We’re trying to make people take a step back and evaluate what they’re hearing and reading. As Natasha mentioned, we’ve put out a fact-based report so at least there is something out there. We have to do our part.
How much effect will the Corporate Income Tax have on the life re/insurance sector?
Scotland Courcy: We don’t yet have the exact number of companies affected, but I think a decent number of us are impacted. Some will have deferred tax assets on their books and may not pay for some years, but I think this is going to have an impact.
Oliveira: Several reinsurers that are US or UK taxpayers have been here for a long time, which goes to show that it’s not a tax haven.
Scotland Courcy: If they’re in scope here, they’re going to be in scope elsewhere, and they will be paying. It’s just that the government is collecting it here. That’s what’s important—we’re not introducing a new tax, we’re collecting the tax.
Chagani: A lot of things are still unclear. We need to learn more about what deductions are allowed, and how it will affect companies that are not US taxpayers, because they have to pay federal excise tax in the US for a reinsurance transaction. How will that be handled?
It can be substantial as well, particularly if you’re reinsuring short-term annuities. All of that has to become clear.
Oliveira: We’re one of, I think, two countries that are starting with a zero base. We don’t have a set of accumulated deferred taxes, etc, or an Internal Revenue Service or established tax office.
Demerling: It reduces the ability of critics of the jurisdiction who want to use the word “tax haven” to do so. In that sense having the tax may be a good thing because it means there is one less thing to be bashed on and we become a “low tax” jurisdiction.
Cayman has said they’re not doing it and some life re/insurers have set up there. Is this a threat to Bermuda?
Chagani: I think we have to look at why Cayman is not doing it and we have to look at the economics there. There are two key things to keep in mind. One is that a lot of their business is driven by funds. And the way it works right now, at least the way I understand it, is that most of their funds are excluded from the global minimum tax. The other thing is that even though they may not have a payroll tax, they have annual fees for work permits. That's one of the ways their government generates revenue.
So if you are bringing in a Chief Actuary of a company, you're paying work permit fees for that person every year. So in essence, the tax structure is different.
Scotland Courcy: What distinguishes Bermuda as a jurisdiction of choice is everything we talked about in terms of the history, the legacy, the decades of industry experience. This differentiates us in an important way. The fact the major players are still coming into Bermuda tells you everything you need to know, which is that the reputation of Bermuda as a key market for reinsurance remains the preference.
I always go back to the regulators because they see the transaction all the way through to reinsurance, retrocession—wherever it lands, they want to know where it ends up. All the work the BMA did with the industry last year to shore up the capital framework lends itself to an easier conversation.
That distinguishes us from any new entrants that may be trying to capture life insurance. You will always have some leakage; some people who for one reason or another choose another jurisdiction. But this is where the major players are.
Hill: I agree, this is the A standard. If you want to challenge that, go somewhere else. It is too risky. You don’t want bad actors trying to find loopholes as it tarnishes the whole industry. So, I completely agree with you. Good regulation is there to protect policyholders. That’s our job.
Chagani: I'll make one more comment with respect to Cayman. A lot of their business is now being done under what is called the 953(d) election, which makes you a US taxpayer. It doesn't matter where you set up that shop, you're going to be paying US tax.
So long as they are a US taxpayer, they are going to be on an equal basis to Bermuda companies with the same tax election. But then what makes Bermuda attractive is all the things that Natasha mentioned, Solvency II equivalency, and NAIC reciprocal jurisdiction status, which very few jurisdictions have currently.
Williams-Charles: Your business model drives where you set up shop. If companies don’t need to be in a jurisdiction recognised by the NAIC or they don’t need Solvency II equivalence to be successful, then they might not need to come to Bermuda. But based on the risk profile and who their customers are, they will come to Bermuda and other jurisdictions that have a similar or equivalent regime in place.
Private equity ownership of reinsurance companies is touched on when Bermuda is being criticised. Is it a legitimate complaint?
Oliveira: I will make one overall statement: all reinsurers are required to follow the same set of rules, whether the funding comes from private equity or a public company. This additional scrutiny seems somewhat unfounded.
Chagani: Many of the so-called private equity/ hedge fund reinsurers are set up as funds. And that fund is typically not just owned by one private equity group, but by a few investors who in many cases are sovereign wealth funds, family offices, pension funds, or large asset managers, and they have their own risk appetites which can be stringent. So the company is going to be governed by the collective risk appetite of its investors
There's no one way to categorise a private equity/hedge fund backed reinsurer because the composition of the fund matters so much. I think Sylvia's point that they are all regulated in the same way is right, so long as those regulations are respected by the companies. The additional questions which may come from the BMA, as they have indicated in the white paper, should be okay because you're following the rules. You're following the regulations and you're doing the right thing.
There are some areas which have come under increased focus when it comes to private equity backed reinsurance, particularly when it pertains to affiliated assets. That is an area which as an industry, we agree that the risk gets heightened and does require greater regulation and scrutiny and an approval process. From a policyholder protection perspective, that is a good thing.
Demerling: The BMA isn’t just an insurance regulator—it’s the sole regulator for the Island, which includes regulating the asset management industry. It understands private equity and funds as an alternative asset manager. The whitepaper you alluded to illustrates the fact that the BMA has voluntarily gone out to market and said: “Here is our experience, here’s our learning, here’s our knowledge, let us share it with you. This is what we’re seeing and what we’re addressing.”
The changes they’ve made aren’t just on assets and liabilities—it’s the risk management framework, addressing conflicts of interest and mitigating them. They’re looking at concentration risks and affiliated risks.
If there’s counterparty credit risk, they want to have prior approval for that. They’re doing it in a very prudent and robust way.
They are recognising that the private equity market might be good at managing assets and getting better yields, but it also has a shelf life, and it might want to have an exit strategy. The BMA, rightly, wants to understand the plan in that scenario, to ensure it can exercise effective oversight of such business models but, to your point, the re/insurers still have to meet solvency margins. That doesn’t change just because somebody wants to put in a redemption or get their money out.
The BMA’s years of experience, on the insurance side, and understanding the asset management side, put it in a very good place to cater for this type of investor. We’ve seen convergence on the ILS side with capital markets and reinsurance, we’re now seeing convergence with private equity and long-term insurance.
What are the challenges and the opportunities for the industry?
Williams-Charles: If history is any indicator, Bermuda will continue to be challenged. We are a small island punching above its weight but we have always been the place for re/insurance solutions and that will continue to be an opportunity. There will be potential headwinds but again, if history repeats itself, we will rise to the challenge, adjust and adapt and continue to be successful.
Chagani: There is a lot of opportunity with respect to what can happen in the reinsurance space. There are quite a few structured and innovative reinsurance solutions that we are seeing being implemented to bridge the protection gap, which requires more reinsurance capacity. We've seen quite a few of those deals come through the market in the last year or two.
The interest rate regime change will also provide some interesting opportunities. When interest rates went up, there were some opportunities that the market capitalized on and continues to do so. And then when they go down, there will be some other opportunities as well.
I also think we've positioned ourselves well in terms of raising third party capital as a jurisdiction. And whilst we continue to see companies form affiliate companies, we're also seeing sidecars and similar structures come in where other capital is being drawn in. That provides a lot of capacity and I think that's going to be a huge asset for Bermuda. We don't see that happen as much in other reinsurance jurisdictions.
In terms of challenges, as Suzanne mentioned, none of this is going to come about in a vacuum. We will have competition, we'll have regulatory changes, we will have changes in the political landscape – these are some of the challenges we will have to navigate.
Demerling: We are the pre-eminent jurisdiction, so we have to defend what we’ve built. But I’m an optimistic person: we are resilient, we’ve gone through the changes in the last couple of years and as a result, the BMA has strengthened. Further, it has hired new talent that’s everybody working and living here and knowing the industry. We have retained speed to market.
Oliveira: In terms of challenges, I’ve seen ongoing regulatory convergence across the world. It feels as though there is a danger in that. If everyone is regulated under the same set of rules, what if those rules are wrong? And what if they’ve missed a risk? Bermuda has a bespoke system where the regulator can examine each of the risks in more depth. Where there are new and unique risks, the BMA can assess and issue bespoke capital charges, or say no to certain risks. This is the level of regulation I’d like to see preserved.
In terms of opportunities for our life sector, artificial intelligence (AI) and data could create efficiencies and growth. Many companies deal with in-force transactions—policies that were set up decades ago, with some still on mainframe systems. Administration of these policies can be overhauled using supercomputing. In terms of experience studies, so much rich data is available in our industry, which could be homogenised by AI, allowing for more robust analysis.
Hill: There is a concentration of talent in Bermuda: the global rock stars and pre-eminent intellectual property in this field concentrated in the equivalent space of a village. There is a brilliant opportunity to bring this talent together, to be curious, to innovate, to think about how you evolve the sector and how to evaluate, innovate and seek to resolve the evolving macro problems we need to get ahead of.
If I take a purely local market view, the thing we suffer from is that we simply don’t have the scale to do the things we want to in terms of investing in digitisation and being able to leverage that scale to make much better partnerships and economic relationships with third parties.
The brilliant thing about Bermuda is that we can come together in this body and look at ways of cooperating while still competing with each other. Competition and cooperation coexist on a daily basis. That is a brilliant thing about our market.
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