Global Reinsurance invited a panel to a roundtable luncheon at the Waterloo House in Hamilton to discuss this, and other facets of business in Bermuda.
Sarah Goddard: How strong is the evidence that Bermuda truly offers ‘convergence'?
Ross Webber: The insurance industry in Bermuda is now substantially established. The island has a reputation as an ‘insurance laboratory', and this is a reputation that is globally recognised. In fact, it is the third largest insurance market in the world. The funds industry is also very established, and at least $30bn is domiciled in Bermuda. Now, it has become an enablement island for e-business. Last year, there was more than a 150% increase in new technology, internet and e-commerce business. The three industries can be mutually exclusive, but there is a convergence and blending of these three core competencies, for example with companies like Max Re. These sorts of companies are looking at alternative investment strategies in reinsurance. Then there is HedgeWorld – a hedge fund e-platform, and InsurEcom. These businesses are increasing in sophistication, and using the concept of convergence.
Audette Exel: It is not surprising that Bermuda is at the forefront of this. Much of the change has been in the players. Here, we have great core competencies.
Sarah Goddard: What are those competencies?
Jed Rhoads: Hedge funds and reinsurers are always checking the regulatory and taxation environments in which to transact their business. In that light, Bermuda becomes a logical move.
Bob Cooney: As a jurisdiction, Bermuda has an appropriate amount of regulation. Here, companies are able to allocate assets such as alternative assets; in certain jurisdictions, it is highly regulated. And while other jurisdictions don't have a deep pool of intellectual capital, we do here. There is a lot of reinsurance underwriting talent. At Max Re, we outsource our asset management. The scale is really important; it is very difficult to get in-house money management if you are a relatively small player – between $1bn and $2bn. We outsource to both the alternative and fixed income sides. Very few companies have complete in-house trading.
Audette Exel: You cannot underestimate the impact Max Re has had. Since it started business, there has been a flood of other hedge funds to replicate the model. Max Re was the first of a number of very high level operations.
Warren Cabral: There is also a number of smaller-scale licensed insurers which have structured for the same scale.
Audette Exel: It is hard, though, to put it together. Stockton Re led in that regard, with a different asset allocation compared to the others.
Jed Rhoads: You have to define the terms, though. I'm not sure who was first and who was second; Max Re brought it to the forefront and brought credibility. Overseas Partners has probably been doing it longer; in 1994, it adopted a very non-traditional asset strategy, run by non-reinsurance people. It was a proving ground to see how much could be allocated to different strategies. For the past seven years, about 50% of the assets have been in different strategies. But we didn't want to go the whole hog like Stockton, instead we wanted a more measured or blended route. Now we are doing it for both clients and shareholders.
Bob Cooney: If you look at the reinsurance side, historically 98% of the business has been highly focused on underwriting. The asset side, which generates most of the profits, is traditionally viewed as a secondary business. We don't want to be too innovative.
We optimise the return of the combined businesses. Most companies have struggled to make a good return, and there are difficulties in the industry. We are in the risk transfer business to make superior margins. There is a lot of capital, and the business is cyclical. You can get better risk-adjusted returns from the asset side of the business.
Audette Exel: The key to convergence is the different attitudes to risk, and making use of alternative asset classes.
Warren Cabral: This has been happening in a small way since 1994. Now people are doing it on a bigger scale and more publicly. It is an amalgamation of skills. Bermuda has all the elements - investment advisers and capital management houses. And people locally have the vision.
Jed Rhoads: I agree. I didn't see anybody from the hedge fund business in 18 years of an insurance career in the US. Now I'm on both sides. Now, there are risk-adjusted return on capital models which take in both sides. There is transparency on both sides.
Bob Cooney: To link the two businesses, there are risk models to link liability and asset risk, and you must bring them together at a relatively fast pace. We have a chief risk officer, that's the nexus of the two businesses; the underwriting and asset models come together. Ten years ago you wouldn't have had the tools.
Audette Exel: We have had years of a soft market, and have had to start to look at the returns. If you look at where businesses make money, it is in asset management.
Bob Cooney: In a down market, it can be a relatively safe harbour. You would expect funds to perform. We have been pleased with the returns in the turbulent equity markets.
Jed Rhoads: The turbulent equity markets are great if you are using alternative strategies because generally they don't track the same way. Having diversification in the portfolio helps.
Sarah Goddard: Where does the e-commerce side fit in?
Ross Webber: As far as employing e-commerce is concerned, there are web-based platforms, and a couple of companies are looking at Bermuda as a domicile. This is demonstrating another facet of Bermuda's core competency – people are looking at Bermuda as an innovative jurisdiction. We have insurE-com, which is offering secure exchange between insurers and brokers, and clients. DotRisk is a risk and claims exchange, and now, Bermuda Fire & Marine allows the client to buy online. We are seeing many more insurance operations moving to web platforms.
Audette Exel: Another example is QuoVadis, which is largely funded by Centre Re. It is part of the eVentureCentre, set up by Zurich Centre Solutions, which is an incubator for e-business. Also, Rebus is being established on the island.
Bob Cooney:E-commerce solutions can be a potential model when there are thousands of transactions, but at Max Re we have had a few hundred submissions. We transmit data through underwriting and submission information, and the actuaries get a ton of information, but we are not a big consumer in that way.
Warren Cabral: It has reached such a pitch now with the internet that communicating electronically is a given. Bermuda, for its part, has the facilities, and businesses are able to converge through the internet with onshore locations.
Ross Webber: I agree with Warren. If there is an electronic component to your business, the place for it is Bermuda. We are sitting on a T3 facility, allowing 15m simultaneous transmissions. If you are going to add a web component, the facilities are here and available, with an advanced learning curve in Bermuda.
Warren Cabral: Definitely, there is an advanced learning curve here. Most people here are heavily dependent on technology, and people think futuristically, by contrast with other places. Bermuda is a futuristic kind of society.
Jed Rhoads: We have tried very hard to work out how technology can help at OPL. From 1 July, we are rolling out a 48-hour initial response time to submissions. In the past, ten to 15 working days have gone by before we could have a substantive conversation about a risk.
Warren Cabral: Bermudian companies have responded to technology by changing their business outlook and their business behaviour.
Derek Stapley: And the payback for us as an island location is much more than for a New York lawyer, for example.
Warren Cabral: Throughout history, Bermuda has been driven by geographical location to innovate. For example, the first telephone exchange was in Bermuda. We had the first underwater cable in 1890. We are driven by the need to communicate with the outside world.
Ross Webber: On the technology front, I recently surfed through the Max Re website and watched an interview on it. Five years ago, you would not be able to get that information. Now, you can be hosted, managed or have a payment method organised in Bermuda. If you want to add that component to your business, it's available here.
Sarah Goddard: What are the factors pushing the use of technology?
Audette Exel: As globalisation and technology increase, it becomes more of an issue. With the decent infrastructure, and tax and regulatory environment, Bermuda is clearly a very, very good place for it.
Warren Cabral: And as financial services converge, the jurisdiction becomes increasingly important. The business must be located somewhere reputable.
Jed Rhoads: Bermuda is interesting from the geographic standpoint. It is easy to get in and out of; other jurisdictions are not as convenient for the east coast of the US.
Ifor Hughes: The focus of Government has been on the reputation of Bermuda. We have tried to make sure there is a quality reputation. We make sure the companies have a good reputation, and that businesses are appropriately regulated – but not over-regulated. We also have a system of tax which is real but not overly onerous.
The Government is committed to making sure the playing field is there. We are allowing the players themselves to use it, rather than dictating to them. Because we already have a well-established competence, it is a natural fit that this would be a trend that Government will embrace. Globally, financial services is so blurred, for example, the Citibank/ Travelers merger. The Government wants to continue to provide creativity, but at the same time regulate it properly.
Audette Exel: And Bermuda received a real endorsement with the KPMG report on regulation.
Ross Webber: The perception of a jurisdiction is very important.
Audette Exel: Bermuda came out of the review fantastically. At the Bermuda Monetary Authority, some of the staff seem to spend all their time looking at onshore regulators. It is almost as if the investigations are trying to find fault.
Sarah Goddard: Why would that be the case?
Warren Cabral: It's down to money. Sensible people structure their affairs to minimise the downside. The new internet mobility means an outflow of revenues, and these countries want it back. They want to protect mobile capital from immobile capital, such as labour. It's all to do with maintaining a tax base.
Audette Exel: There is an increasing move to regulate ‘dirty money'. Bermuda supports that move. It is not just under attack from taxation bureaucrats, but there are legitimate moves to trace money as it moves around. We control capital flow through this country. Bermuda has been noticeably absent from any major scandal. There is a phenomenal reputation Bermuda has built up because the service providers are united in keeping Bermuda clean.
Warren Cabral: A lot of enquiries have touched on money laundering, but the offshore world accounts for a minute percentage of money laundering. Bermuda and the offshore jurisdictions don't figure on the list of the top money laundering centres.
Ross Webber: Bermuda has been held to higher standards than onshore jurisdictions.
Jed Rhoads: We have seen perceptible improvements in European cedants' acceptance of business with Bermuda.
There are changes on the way – French tax laws, etc, loosened up about a year ago and some of the German laws are loosening.
Audette Exel: The Swiss are also close to approving the jurisdiction to domicile investment funds. For example, pension funds can only be set up in approved jurisdictions. This is similar to the recognition of the Bermuda Stock Exchange by the New York Stock Exchange, and we are going to get similar approval from the UK.
Ifor Hughes: Those who have taken the trouble to meaningfully explore the regulatory framework and legislation have been favourably impressed. Often, the offshore domiciles are lumped together. Once others have seen what we are doing, they have seen why Bermuda should be in the top tier of jurisdictions. The only problem has been when the reviews haven't taken the time and effort. We welcome the opportunity to show why Bermuda should be in the top tier.
Ross Webber: There is still a perception that Bermuda is in the Caribbean and a seedy offshore place, especially held in the US. We have started to break that apart with other financial communities coming to the island, such as asset management and hedge funds.
The reports have helped us break away from the other jurisdictions.
Derek Stapley: In my experience, there is certainly not a perception problem in Europe.
Ross Webber: And in the US, Bermuda has recognition as a qualified jurisdiction by the Internal Revenue Service. We have that where a lot of other jurisdictions don't.
Jed Rhoads: The negative US perceptions are from the regulatory tax situation, and from the pre-1985 people who remember the early to mid-1980s collapse of the market in Bermuda, and they wonder whether it will happen again.
Bob Cooney: When I was travelling around the world to raise capital to set up the business, my perception was that Bermuda has a very good reputation with sophisticated investors. This was before the reports into offshore jurisdictions came out. We still raised more than $500m from 220 investors. If anything, Bermuda is seen as a positive place, because of the success of some of the larger players.
Sarah Goddard: But there are still views held in certain quarters that Bermuda has an unfair advantage. In particular, there have been moves afoot in the US Congress, inspired by US insurers, to tax Bermudian companies.
Warren Cabral: The proposed US tax treatment of Bermudian companies is protectionism in the extreme. Some of the US companies involved have had Bermudian operations. But mobile capital will go wherever it makes sense. There are ways around the problem, by going through a third party, for example.
Bermuda doesn't place limits on its dreams. It is the third largest reinsurance market in the world, and convergence is really the convergence of intelligence.
Sarah Goddard: What are the downsides to business in Bermuda?
Jed Rhoads: Bermuda is utopia to transact business. You can attract and retain people. ACE and XL have relatively big businesses – but can Bermuda support it?
Audette Exel: It doesn't need to.
Ross Webber: Bermuda is looking for businesses which don't need lots of people.
Audette Exel: Max Re has 18 people. We are looking for Max Re-type businesses.
Ross Webber: We don't expect to see a massive influx with these businesses, but when they form, they will look to here. We have, for example, ISIS, XL, the funds industry and technology, so when people are looking to put convergence companies together, the elements are here. There isn't a massive influx of numbers, but there is substantial interest. Since Max Re set up, we have seen a lot more in the past year.
Warren Cabral: We see it in deal making. For us, there are lots of large deals, both in volume and complexity. But there isn't overloading – we can just pass it wherever we want to in the firm's international offices. We can outsource it, though it's of Bermudian origin; the domicile will always matter from legislative and fiscal points of view.
Jed Rhoads: The ability to attract funds will always be there. The ability of companies to grow is the problem. It is difficult to get the right experienced staff on to the island. To execute, you need certain infrastructure around to take ideas and run.
Warren Cabral: And subsequent growth management is important.
Audette Exel: You must ensure that infrastructure keeps pace with the speed of change.
Bob Cooney: Bermuda is on the cutting edge of new products, and has been for 15 years or so. There are also large limits with a number of reinsurers. It is an exciting place to be. It's not just about paying more or giving new stock options – it is also being involved in the next stage of evolution of insurance companies. On the life side, we had to bring in a team to the island, but we were very successful because the convergence concept really appealed to them.
Audette Exel: And Bermuda is a nice place to do business. It is a market with a lot of integrity, and is an interesting blend of cutting-edge business skills and gentlemen's clubs.
Warren Cabral: From the lawyer's perspective, we have had to recruit because of a shortage of staff, but in Bermuda there is a good variety of work.
There is breadth and scope here; it is intellectually stimulating to come here. And with the regulatory environment, it is wide open in its scope so that you have a reasonably clean sheet to write a business plan.
Ross Webber: Also, in Bermuda you do get a chance to rub shoulders with the industry leaders. You can learn and flourish from that.
Derek Stapley: Twenty years ago, a two-year stint in Bermuda was seen as a holiday. Now it is seen as a big benefit to a résumé.
Audette Exel: I left Bermuda after six years to set up a new company. I looked at the options and came up with Bermuda – I turned round and came back a year later. ISIS is a convergence company. It is a business that funds a charity – convergence between the commercial and charitable worlds. Bermuda has given us massive support, and there would have been no other area of the world where it would have worked like this.
Sarah Goddard: How stable is the environment in Bermuda?
Warren Cabral: After the change in government, the regulatory regime remained unchanged, the infrastructure was unchanged. Although the political hue now is towards a more liberal environment, from the Bermuda Monetary Authority's perspective, it is a very substantial central banking regulator.
Jed Rhoads: It is important that Bermuda stays focused and we don't get too far ahead of ourselves. If I have a fear, it is that success will go away because of greed and access.
It's important to not just accept things are perfect here, and to accept they could get better is a good thing.
Bob Cooney: Bermuda has prospered greatly from the mobility of capital and people. It can go out just as easily as it can go in. If we get complacent and put in policies to cause capital to go elsewhere, it will not lose business in a heartbeat and go away. It has happened before and governments have caused companies to leave.
Warren Cabral: Because Bermuda is a small economy and is a small size, I don't think we will lose sight of it.
Ifor Hughes: From the government's perspective, there is a recognition of the perils of taking steps that might be seen as anti-competitive.
But there is still a constituency to answer to – it is a case of striking the right balance. Bermuda has a system of consultation. For example, for work permits, there was significant consultation over time on that subject. The minister took sufficient time to make sure the stakeholders had a say. It has been about as good a balance as could have been struck under the circumstances. Bermuda will do the best it can to strike a balance.