Once regarded as an usurper in the insurance arena, the Bermuda market has now come of age and gained widespread acceptance. Roger Gillett looks at the stages in Bermuda's development, leading to today's close links with the London market.
“Long, long ago (early 1980s) on an island far, far away an insurance industry was struggling to emerge. The industry had been damaged by a soft market and in its weakened state was under attack by competing domiciles.”
These words scrolled onto a computer generated presentation screen, accompanied by the theme tune to Star Wars. The presentation was given at a Bermuda Insurance Institute luncheon attended by both senior executives and newly qualified students. Its purpose was to challenge these students to become the “Jedi Knights” of Bermuda's insurance industry, these positions having first been created by Jonathan Crawley (an underwriter in Bermuda in the early 1980s) when he gave a presentation to a visiting conference group. It was corny, I know, but it worked for me then.
Another part of the presentation analysed the unique and relevant features of the Bermuda market that differentiate it from other domiciles and other insurance markets. Who is Bermuda's competition now compared with who it was, and who would our competition be in the future? Also, how is the competitive position reflected in the make-up and structure of the companies operating in Bermuda?
For a brief period in the late 1970s and early 1980s, we may have viewed ourselves as competitors in the worldwide insurance arena. As it transpired, of course, we found that we were an abused and unnecessary piece in a complex jigsaw. Principally, however, most of us viewed our competition as being the other emerging captive domiciles. This was simple to understand and the “Jedis” of the day had a clear idea as to whom they were fighting.
London and other insurance centres were able to dismiss us as irrelevant and pour scorn on our “naive” attempts at entering their competitive arena. But how things change! With the hard market crisis of the mid 1980s, Bermuda suddenly became extremely relevant, with the creation of ACE, XL (now XL Capital) and CODA - companies offering previously unheard of blocks of capacity to their shareholders and creating the basis for companies whose success stories continue.
While acknowledging these companies' success, the competitors still used Bermuda's experience in the late 1970s to question its stability. Their discomfort peaked with the creation, in 1993, of the new property catastrophe reinsurers, attracting $4 billion of capital to the island. Gasps of concern and some of envy were heard throughout the world of insurance and reinsurance.
At various stages in these developments, major players in other markets came to the realisation that, not only could they not ignore this upstart market but that it would behove them to become participants in it. What a turnaround! The very people who were critical of Bermuda now saw the need to be a part of it and the appearance of Bermuda on a personal resumé turned from a negative to a positive factor.
In 1994, Robert Hiscox spoke at a conference on the island. Then deputy chairman of Lloyd's, he emphasised the complementary relationship of our two markets. Was this a turning point? Well, the public criticism certainly seemed to lessen.
The story, of course, did not end there. In March 1996, ACE acquired 51% of London-based Lloyd's managing agency Methuen Underwriting and, in August 1998, XL acquired Mid Ocean Re who owned the Brockbank Group. ACE's and XL's Bermuda base could no longer accommodate their growth aspirations and they needed access to a more globally accepted platform. It seemed that Bermuda companies were leading the move towards corporate capital at Lloyd's. The subsequent acquisitions of Ockham Worldwide and the balance of Methuen Underwriting by ACE, and NAC Re, who owned Denham Syndicate Management, by XL further ensured integration of the insurance markets in Bermuda and London to such a degree that the success of both are now intertwined. Secondment of personnel from London to Bermuda and Bermuda to London has also exposed a number of people to the strengths and attributes of each other's markets.
As with other areas of commerce, the distinction previously made between Swiss companies, German companies, British companies, US companies, Japanese companies and, yes, Bermuda companies becomes irrelevant. The removal of geographic boundaries has meant that a company's country of origin is incidental. All that matters is its ability to compete in a single global market.
It is interesting to note that, of the total capacity of Lloyd's, 20% or $2 billion is managed by companies whose parents are Bermuda based companies. This acquisitive expansion is not limited to Lloyd's. Acquisitions in the United States by ACE, XL and Partner Re, and, in Europe by Partner Re, are a further display that capital is moving freely both into and out of Bermuda.
Bermuda has progressed from being a dependent child, through a period of precociousness, to a rebellious teenager and now to mature adulthood, interacting with its older siblings as an equal, but with its own distinct personality. And what is its personality? Young, energetic, bold and willing to take risk!What does this mean for our up and coming “Jedi”? The captive world is dominated by the broker owned managers who are represented in all the major domiciles, having the same need for global representation as the insurers.
The competitive spirit for those working in the insurance and reinsurance companies and captive managers is still there, but it seems, except in rare circumstances there is no need for the use of the “light sabre”. The competition has been reduced to a far more friendly game.Global Reinsurance editor Lee Coppack was the first to describe Bermuda as “The World's Insurance Laboratory”, and it is probably in this context that we exercise our competitive instincts. Bermuda was once an importer of both capital and ideas. We claimed we were innovative when in truth, to a large degree, we were implementers of ideas developed elsewhere. That has changed, and there is a wide acknowledgement that, if a company has a large risk problem, one of the best places to develop a solution is Bermuda. Bermuda is pioneering captive pooling, rent-a-captive structures, parametric trigger covers, insurance options, integrated covers, credit enhancement and project finance programmes.
It is likely that Bermuda's future growth will emanate from these new products. In that regard, will it be in competition with London and other markets? To some degree maybe, but I believe that, within these global insurers and managers, whether their ultimate ownership is in Bermuda, New York, London or Zurich, there will be an acceptance that, because of regulatory flexibility, concentration of intellectual capital and access to financial capital, certain products are best developed and offered in Bermuda.
Our “Jedi” will be told to continue to exercise their competitive instincts in this peaceful period but keep the “light sabre” armed and close to hand. Darth Vader may still be out there somewhere!
Roger Gillett is senior vice president business development and captive management, ACE Bermuda Insurance Ltd.