BERMUDA
David Fox of the Bermuda Insurance Development Council outlines the strengths of Bermuda as a leading centre for re/insurance, captives and ongoing innovation.
a key part of the solution to high catastrophe claims demonstrates the excellence in global risk financing found in the Bermuda market.
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Delegates to the annual conferences of the Captive Insurance Companies Association (CICA) and the Risk & Insurance Management Society, Inc. (RIMS) are very familiar with the industry-leading work done in Bermuda in captive insurance. But unlike other captive domiciles, Bermuda also has a busy commercial insurance market that provides specialty coverage for corporations, and a substantial reinsurance market that is highly visible in the catastrophe space.
The needs of the international market have fuelled growth in the Bermuda insurance industry for many years. A recent case in point is Bermuda becoming a jurisdiction of choice for the placement of catastrophe bonds.
High-profile hurricanes in 2005 led to a critical time for insurance linked securities (ILS)—financial instruments whose values are driven by insurance loss events. They are linked to property losses due to natural catastrophes, representing a unique asset class, the return from which is uncorrelated with that of the general financial market.
After Hurricanes Katrina, Rita and Wilma, the “Insurance Island” became a key place for investors to form sidecars, limited purpose companies created to work in tandem with insurance companies. Reinsurance sidecars purchase a portion or all of an insurance policy from an insurance company to share in the profits and risks. If the underwritten policies have low claim rates while in possession of the sidecar, the investors will make higher returns.
When 2010 and 2011 again brought high catastrophic losses, demand for ILS products spiked again. New reinsurance capital was suddenly available at lightning speed, and that capital was deployed in different underwriting structures—sometimes directly or through an ILS fund— rather than being invested in equity in a new reinsurer or a sidecar.
Anticipating new demand some years before, the Bermuda Monetary Authority (BMA) created a new regulated classification—that of special purpose insurer (SPI)—and created a new regulatory framework to accommodate them.
nsured catastrophe losses incurred from hurricane, earthquake, flood, brushfire and other natural disaster events topped $100 billion in 2011, a costly year that impacted income statements of global reinsurers. The fact that Bermuda reinsurers were again
SPIs are special purpose, single transaction, or single customer insurance companies which assume re/insurance risk and which, typically, fully fund their exposure to such risk. Sidecars and catastrophe bonds are examples of such entities.
Cat bonds are a high-yield debt instrument—usually an ILS that is meant to raise money in case of a catastrophe such as a hurricane or earthquake. Special conditions may state that if the issuer (an insurance or reinsurance company) suffers a loss from a particular pre-defined catastrophe, then the issuer’s obligation to pay interest and/or repay the principal is either deferred or completely forgiven. The advantages of cat bonds are that they are not closely linked with the stock market or economic conditions, and so offer significant attractions to investors.
SPIs allow capital market investors the ability to invest in re/insurance markets quickly, with readily available access to underwriting expertise. The BMA’s chief executive officer, Jeremy Cox, credited SPIs with contributing to the strong number of incorporations in 2011. In fact last summer he talked about how pleased he was to see earlier regulatory changes translate into more registrations. He said: “It was exciting to see … the board of the California Earthquake Authority, that state’s quasi- governmental residential earthquake insurer, approve a $150-million catastrophe bond issue via a Bermuda SPI, Embarcadero Re.”
Meanwhile, insurance manager Andre Perez, chief executive of Horseshoe Management, was quoted by Aon Benfield in its fourth quarter update on ILS as saying, “What I find the most fascinating is the meteoric growth of collateralised reinsurance. It is rare to find a cedant who will not accept collateralised reinsurance these days. It is, somehow, the ultimate security. Of course, it does not cover the full spectrum of traditional reinsurance needs due to various limitations but if anything, the importance of collateralised reinsurance is a change that is here to stay and will increase in importance.”
The fact that more of this business is looking to the Island is not surprising. There has been a series of occasions when catastrophe events and market difficulties were followed by waves of new capital heading to Bermuda.
The challenge in the mid-1980s was the collapse in the excess liability insurance market, which led to the founding of ACE and XL in Bermuda. The 1992 Hurricane Andrew led to the formation of several new Bermuda reinsurers. While new insurers and reinsurers are formed in Bermuda every year, the flight of billions of dollars in capital to
CICA | Forty years of captive leadership 107
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