Bermuda's companies should outperform the industry under the combined pressures of low rates, higher losses and unfavourable economic trends, says Lee Coppack.

There is a testing time ahead. The first quarter 1999 results are showing the effects, particularly in reinsurance, of softer rates and increasing claims. Combined with low interest rates and flat demand, these market conditions will put financial management in the spotlight. It should be a time for Bermuda companies to shine.They have from the start embraced the concept of efficient use of capital, and a number are already using dynamic financial analysis (DFA), as described on page 29 to analyse the interaction of the various elements of the business, assets and liabilities, with that of economic factors.

The options for a public company in such an over-heated market are limited to increasing underwriting, which carries with it the risk of increasing aggregate exposures, returning capital to shareholders or diversifying. Founded on a philosophy of careful monitoring of aggregates and high retentions, Bermuda companies do not want to be seen to be falling into the trap of underwriting for cash flow. As a result, they are following a policy of combining the latter two options: returning capital and diversifying.

One result is that integrating geographically spread and disparate business units into what has been very lean organisations will be another challenge for their management, partly where they have to take on board the considerable administrative burden of meeting US regulatory requirements.In the article on page 19, PartnerRe president and ceo Herbert Haag describes how the once mono-line property catastrophe reinsurer has in just two years transformed itself into one of the world's largest professional reinsurers.

It may take time to see if decisions taken in 1998 and 1999 manifest themselves in results which are significantly better than industry averages, but how the Bermuda companies deal with the lowest part of the market cycle will be critical to future developments in the international industry.

Our fourth annual review of Bermuda companies prepared by PricewaterhouseCoopers, which begins on page 63, reflects the extensive changes which have taken place in the market. The boundaries of the three original, comparatively neat categories, excess liability companies, property-catastrophe reinsurers and finite risk carriers, with which we began three years ago have almost disappeared. In their place this year, PricewaterhouseCoopers has grouped the companies they have analysed under just two very broad headings: larger diversified companies (ACE, XL Capital and PartnerRe) and speciality companies within which are included finite risk and property-catastrophe oriented companies, industry captives, other speciality companies and others. Some companies within the second group, though smaller than the big three, such as Terra Nova, Commercial Risk and Overseas Partners (OPL) are equally ambitious and are also diversifying and expanding.

An interesting trend noted by PricewaterhouseCoopers is the growing level of collaboration among insurers on specific projects. In autumn 1998, for example, ACE Bermuda, XL Insurance and OPL jointly established a catastrophe insurance programme for the international airline industry.As Price Lowenstein explains (page 36) co-operation between companies, led by ACE and XL, has established Bermuda as a world leader in another class of business - political risk - from virtually nothing in just three years. Today, these two companies are together by far the world's largest providers of underwriting capacity to the private market in this class.

Some of the largest corporate changes announced, such as ACE's acquisition of the international business of US insurer CIGNA, will be completed during 1999, and so the picture next year will look substantially different again. As PricewaterhouseCoopers remarks, it is increasingly evident that a key element of Bermuda's role as an international (re)insurance centre is to provide a setting for change and development to the extent that the Bermuda Insurance Marketing Committee has adopted the phrase “the world's insurance laboratory” as its slogan. The process can be seen at work in list of new projects and companies reported by Roger Crombie on page 16.

Wider scale
Bermuda is also changing on the wider scale. It has a new political party in power for the first time in 30 years. The Progressive Labour Party (PLP) was elected in November 1998, and in March the UK government published a white paper, Partnership for Progress, which will change the status of dependent territories, like Bermuda, into overseas territories and offers UK citizenship to their residents.

The new government is avowedly pro-business. One of its primary aims is also to increase the range of jobs available to Bermudians through the revival of tourism and an increase in education opportunities, so more Bermudians can take up the technical and managerial roles created in the island's insurance industry.UK citizenship will also offer advantages to Bermudians, because it will mean they can study and gain work experience, not just in the UK but throughout the European Union. Bermuda's international companies would far rather hire suitably experienced and qualified local people than bring in outsiders. Language skills, perhaps developed through study in Europe, could attract a wider range of tourists. As the Premier remarks, geography - or rather a shortage of it - dictates how Bermuda develops. Bermuda is a small island, but as in other respects, limitations often spur ingenuity. What will not help Bermuda, however, is a small islander mentality.

The PLP has stated it does not want to see Bermuda's zero tax status change, but as a small jurisdiction, the island cannot escape wider pressures over tax issues, as both the Organisation for Economic Co-operation and Developments (OECD) and European Union look to iron out tax anomalies. There is clearly a public relations job ahead for the government to convince the international community that zero tax does not equal tax haven.

With the help of the three largest insurance operations on the island, ACE, XL Capital and American International Group (AIG), the government has set up a high level advisory committee, chaired by the chairman of the International Business Forum, to deal with the matter. The government has also hired a public relations agency to represent Bermuda's interests at a national level in the United Kingdom and Europe.

Bermuda's tourism was suffering, but the island has proved close to an ideal environment for the growth of a modern risk transfer and finance industry with the development not just of insurance and reinsurance companies, but finite risk insurers, risk transfer vehicles and risk exchanges. The expression “insurance laboratory” is not actually a wide enough description. The industry for its part has brought great benefits to the island by its massive contribution to the economy and among other things, a range of jobs which would not otherwise have been available to Bermudians without leaving the island.

Lee Coppack has been an insurance writer and analyst for over 20 years. She is co-editor of Global Reinsurance and editor of the Bermuda edition of the publication.