Looking back
TREASURE ISLAND
Intelligent Insurer looks back at the growth of the insurance and reinsurance market in Bermuda and how it is set to develop in the future.
T
he roots of this lively market lie in the 1960s, when Fortune 1000 players in the US
became increasingly interested in managing their own risk. Bermuda was the ideal platform for innovators to experiment in the captive market.
In 1985 however, a hard market in the US commercial lines sector led to the formation— initially by policyholders—of ACE and XL, both of which were run along the lines of a mutual.
“Those companies took root in Bermuda
because of the knowledge their founders already had about the captive business there,” says Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers.
“They knew they could quickly get a licence
and that there was infrastructure in place for legal and accounting fi rms, along with service providers in the actuarial fi eld. This meant that Bermuda was a convenient place to conduct business for US-oriented fi rms focused both on the liability crisis and the need for high level insurance not available in the standard market.”
Fast forward a way and in 1992 Hurricane
Andrew created a shortfall in property- catastrophe reinsurance supply in the US.
This was an industry-changing event. According to Kading, before Hurricane Andrew, no one in the US thought losses from a single hurricane could be as great.
52 | INTELLIGENT INSURER | November 2011 “Before Andrew, no US insurer bought more
than $100 million dollars in catastrophe cover. But afterwards, multiple insurers decided they needed $500 million,” he explains. “This created an enormous demand and about seven Bermuda companies were formed to meet it, with investors eager to make a return by providing that coverage.”
As Kading goes on to explain, Andrew was
shortly followed by the Northridge earthquake in 1994.
“This was another paradigm-shifting event in
the US in terms of the size of losses arising from an earthquake. It simply reinforced the need for the catastrophe cover which those companies were providing.”
Following the attack on the World Trade
Centre in 2001, another global hard market hit all lines of business. Losses resulting from the attack were characterised fi rst by a very large property loss and then by a large liability exposure, with signifi cant reserves posted for future lawsuits.
This loss was then compounded by a huge
decline in stock market values in the US and European markets.
“That situation created the opportunity for
another group of insurers to meet the growing demand for insurance products with the incumbent players having had their surpluses
substantially damaged by the two punches from that event,” Kading says. Then in 2004, a quartet of hurricanes criss-
crossed Florida in sequence, changing the accepted wisdom relating to frequency of events. It then took Katrina, Rita and Wilma in 2005 to change the game further in terms of severity of events, argues Kading.
“Altogether these events created a new
demand for property-catastrophe cover. New capital was found to meet that need, and in 2005 and 2006 once again those companies chose to incorporate in Bermuda,” he says.
In the future, the conventional wisdom is
that Bermuda will not be seeing new company formations. Rather, new consumer demand will be met via sidecars and catastrophe bonds.
“Sidecars are a more effi cient way to put
capital in and take capital out, existing for defi ned periods, so that investors get the money out when they wish, as opposed to the equity investment in a start-up company where it is more diffi cult to get your cash out,” says Kading.
“Sidecars are also more effi cient because
the incumbent carriers are doing all of the underwriting. That means you don’t have to have any new staff to do it and you manage the moral hazard by making sure that the initial underwriter is keeping a share of the risk before passing the rest of the liability onto the sidecar investors.”
©
iStockphoto.com/mdgmorris
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