Bermuda: The State of the Bermuda Insurance Industry

The state of our Bermuda insurance industry is strong. This is a testament to the robust resilience of the Bermuda insurance market-place which continues to prosper and evolve in arguably some of the most adverse conditions the insurance industry has ever faced in the wake of the tragedy of 9/11 and the collapse of Enron.

The events of 9/11 precipitated a devastating loss of capacity in the insurance market worldwide – estimates of this outflow of capital vary from between $35 billion to as much as $100 billion. Paradoxically, the attacks of 9/11 were followed by an influx of new capital into Bermuda free of legacy encumbrances and 9/11 losses. More than 100 new insurance companies have been incorporated in Bermuda since that time, of which 12 have capital in excess of $1 billion. Moody’s reported that the largest Bermuda start-ups attracted in excess of $13 billion of start-up capital, or about half of an estimated $27 billion of fresh capital raised worldwide post 9/11. In addition, this influx of new capital has been accompanied by a profusion of capital offerings (including three successful IPOs by members of the so-called ‘class of 2001’) and by strategic acquisitions such as the acquisition by Endurance of HartRe’s property casualty reinsurance business.

This article summarises some of the key features of the Bermuda insurance market in 2003 and considers some of the factors that have contributed to its continued success.

A residual strength of the Bermuda insurance market continues to be the core captive insurance market. Since its emergence as a leading insurance centre, Bermuda has been an insurance laboratory for cutting edge alternative risk products of which the captive (developed by a Bermudian, Fred Reiss, in the 1960s) was perhaps the first example. Bermuda remains the leading domicile worldwide for captive insurance companies. According to the June 2003 issue of the Captive Insurance Company Reports, Bermuda has a total of some 1,426 captives, representing almost 30% of the world captive market and is almost double the number of captives incorporated in the next largest domicile (Cayman) and more than three times the size of the third largest domicile (Vermont). New captive formations continue to be driven by the hard market conditions in which we find ourselves – some 79 new captives were formed in 2002 in Bermuda as insurance companies seek to reinsure more of their risks via bespoke captive reinsurance arrangements.

The continued strength of the Bermuda alternative risk insurance market owes much to the close co-operation that has always existed between all those involved in the insurance industry here – the recent enactment in Bermuda of public segregated account or protected cell legislation emphasises the determination of the Bermuda legislature to be in the vanguard of facilitative but responsible legislative development. The segregated accounts legislation (introduced in 2000 but recently amended in 2002) is arguably the most sophisticated public segregated cell legislation anywhere in the world and draws on the experience of legislation in other offshore jurisdictions. In fact, Bermuda had been the first offshore jurisdiction to provide for the establishment of segregated accounts companies by private legislation. However, it is anticipated that the introduction of the new public legislation in Bermuda will lead to an increased use in rent-a-captive structures providing for the existence of segregated cells in which the assets of one cell are segregated from and may not be utilised to meet the liabilities of another cell. There are already well over 100 such segregated accounts companies in Bermuda – they offer a lower-cost alternative to conventional captive insurance company structures.

There continues to be an emphasis on developing new solutions in the alternative market for clients whose insurance needs are not adequately addressed in the commercial market – indeed, this emphasis is even more pronounced in a hard market. Bermuda is well positioned to take advantage of the convergence of the capital markets and the insurance industry as its insurance legislation was amended in 1998 to provide that parties may enter into certain "designated investment contracts" which are statutorily deemed not to be insurance (where such contracts would otherwise be regarded as wagering contracts at common law). Recent examples of alternative risk product development include the evolution of weather derivative and financial guarantee/credit enhancement products.

A key feature in recent years has been the development in Bermuda of a serious market for reinsurance capacity and the evolution of Bermuda into a market of choice. It is true that both ACE and XL were both incorporated in the late 1980s at the time when the excess liability crisis in North America took hold but they had not at that time developed into the huge behemoths whose headquarters now dominate the Hamilton skyline and who cut a significant figure on the worldwide reinsurance stage. A major infusion of new capital followed in the early 1990s with the formation of the "big cats", the specialist property catastrophe reinsurers set up in Bermuda in the trail of Hurricane Andrew. The recent influx of capital has seen the entry into the Bermuda market of some 10 "Class 4" companies including Allied World Assurance Company Limited, Endurance Speciality Insurance Ltd and Montpelier Reinsurance Limited – it is noteworthy that although the 9/11 attacks accelerated the entry of some of these companies into the Bermuda market, there were nonetheless plans in place to introduce a significant portion of this new capital prior to 9/11.

The place of Bermuda as an important reinsurance centre has been cemented by the class of 2001 start-ups including some notable new formations in the life reinsurance market. A significant new (pre 9/110 incorporation was the formation in 2001 of Grand Central Re Ltd. (funded 92.5% by Bayerische Hypo-und Vereinsbank AG and 7.5% by Max Re), to underwrite speciality and life reinsurance. The formation of Grand Central Re confirms that there is an evolving and more diversified insurance market in Bermuda which has moved beyond its traditional property and casualty base (although property and casualty oriented reinsurance companies remain an important part of the reinsurance industry in Bermuda and have generally benefited from premium growth as a result of an improved pricing environment). It is expected that the life insurance market will continue to prosper in Bermuda - in addition to reinsuring life policies written directly by insurance companies looking for security, life insurance companies in Bermuda can offer tailored products to high net worth individuals for whom the tax and regulatory environment in Bermuda is attractive.

A key strength of the Bermuda insurance market continues to be its facilitative but responsible legal environment. We have already referred to the amendment of the insurance legislation to recognise the convergence of the insurance and capital markets and the adoption of new segregated cell legislation. Another important amendment was the adoption in 1995 of a multi-class system for licensing insurance companies into 4 classes ranging from a pure class 1 captive through to a class 4 insurance company (for the ACEs and XLs of the industry). This multi-class licensing system recognises the diversity of the Bermuda insurance industry and permits a graduated approach to the regulation of insurance companies so that, although there are certain irreducible minimum requirements that apply to all insurance companies, class 4 "big cats" are subject to more exacting reporting and capital solvency requirements than class 1 captives. It is also a significant feature of the legal landscape here that Bermuda has generally regulated reinsurance companies in the same way as insurance companies – it is interesting to reflect that it is only now that Europe is moving to introduce a system of regulation for reinsurance companies which will come into effect during 2005/2006.

Another manifestation of the strength of the Bermuda market is the leading presence by Bermudian insurers in other insurance markets, particularly in the Lloyd’s market. This strong showing was maintained in 2003 with the total amount of capital provided by the top 6 Bermuda-owned managing agents reaching 2.45 billion GBP, a 13% increase on the 2002 figure. A further interesting twist (which also demonstrates the continuing evolution of the insurance market here in Bermuda) has been the establishment by Lloyd’s companies setting up their own Bermuda insurers such as the formation by Goshawk Insurance of a Bermuda subsidiary and by WestGen of Catlin Insurance Limited.

This article has highlighted that Bermuda has evolved from a one or two-dimensional market into a multi-dimensional market that is unarguably one of the leading insurance and reinsurance centres in the world. There is every reason to believe that the state of our Bermuda insurance industry will continue to be strong.