Bermuda never stops changing. There are new ideas, new developments and new companies all the time. Our third survey in co-operation with Price Waterhouse in Bermuda demonstrates that the island has a healthy and still increasing range of successful companies.
In the widest picture, insurance and reinsurance is part of the unfolding evolution of financial services worldwide in which Bermuda has already played a significant part. That evolution is taking place on a global stage with mergers of breathtaking size occurring almost weekly. No one can yet say what the end product of these changes will be, let alone how each constituent part will develop.
There is tremendous will in Bermuda to play an active role in the future of financial services and not get swept along passively by the tide. Bermuda retains many advantages for international insurance and reinsurance companies; tax, infrastructure and flexible regulation are among the most important. The success of established companies also generates a certain momentum. There will also be pressures on some of the features which have made the island so successful as market conditions converge in the developed world.
Greater transparency in company accounts and increasing consistency of accounting standards will make it possible for investors to compare more precisely the performances of a wider range of insurance and reinsurance companies, not just those in the anglo-saxon world. Thanks to the global movement of capital, the less successful will be pressured to emulate the more successful. Some of the rivals of Bermuda companies are rich and powerful. They may move more slowly but when they do it is with considerable weight behind them.
Deregulation, especially if it goes ahead for commercial business in the United States, should make domestic markets more attractive. Even as it is, Bermuda companies have felt the need for physical presence in the US or London for the greater business distribution.
Establishing onshore subsidiaries will mean that corporation tax will become a factor in the results of Bermuda companies, although it is too early to tell if this will be material. Clearly, in establishing onshore operations in the US, both ACE and EXEL feel that the advantages of direct access to the market outweigh any tax disadvantages. Nor did the tax issue inhibit AIG from bringing Starr Excess under its control and domesticating it.
The whole picture of insurance and reinsurance is so fluid that the shape is changing like a chimera even as we try to describe it. What seems certain is that there will be much less distinction than in the past between the activities of investment banks and insurance and reinsurance with a considerable grey area in between. For our roundtable this year, we brought together some of the leading thinkers in Bermuda to discuss just this issue. Their conversation beginning on page 8 shows that it may well be here that Bermuda retains its leading edge.
Although they mostly started to fill specific gaps in the US insurance market, Bermuda companies began with the advantage of a fresh approach: they always realised that the basis of insurance and reinsurance is function and not product. As a result, they have always looked closely at the numbers involved and used analytical tools to develop their business, price products and manage their aggregates and their capital. The skills and models they have built up are just what is necessary to develop and price sophisticated risk transfer products which will attract non-insurance investors.
The Bermuda government strongly supports innovation by the island's insurance community, as the article by company registrar Kymn Astwood on page 27 shows, and it does not have the constraint of opposition from other powerful interest blocks in doing so. In addition, other commercial interests on the island, such as the Bermuda Stock Exchange (BSX), want to grow by working with the insurance and reinsurance companies.
There are natural geographical and human resources constraints which affect the ability of Bermuda's companies to expand on the island; some of these factors will diminish in importance as systems and telecommunications improve as our article on page 57 shows.
The captive market, too, is developing. Bermuda remains the largest captive domicile in the world and despite the soft commercial market and competition from an increasing number of domiciles, it continues to add new captives at a rate which others envy. What is changing is the way in which captives are being used. Ownership of a captive can give companies a more direct competitive advantage than pure risk management. Today, captives are being used to enhance the value of products or services by selling it with some form of insurance, while the sponsor also intends to make a profit on the insurance itself. Warren Cabral explains on page 72.
The question for insurers and reinsurers today is not, as it might have been five years ago, just one of being able to prove they could survive a run of losses and keep underwriting. Comparatively low claims and buoyant investments markets have seen to that. Successful insurers and reinsurers will be those who can keep a healthy book of business and show an attractive performance to investors in the face of either soft markets or greater losses or both. The stock market performance of Bermuda's listed companies (see page 30) indicates that investors regard them with favour.
The article on page 66 shows the sophisticated approach a number of Bermuda companies are taking. Thanks to advances in technology, they can use dynamic financial analysis (DFA) to look at interactions between elements of the business over which they have little control, for example catastrophes or interest rates, and between them and aspects of the business where they do have choices, such as capital structure.
The comparative performances of Bermuda's leading companies are unfolding over time. In this year's Bermuda edition of Global Reinsurance, the Price Waterhouse team has significantly expanded its analysis of the Bermuda market, starting on page 33. It has added two additional excess liability and three finite companies to the analysis plus 16 other important companies to the study. Together the 36 companies covered by the survey make up over half the commercial market by premium volume and two-thirds by assets. In addition, the survey has introduced separate sections covering new ventures and innovation, Bermuda companies' investment in Lloyd's and mergers and acquisitions.
The results of this third Price Waterhouse survey are further evidence that some of the most rigorously managed insurance and reinsurance companies in the world are based in Bermuda. Bermuda should be proud, but not complacent.
The fourth Bermuda insurance symposium will take place from 16 to 19 February 1999 at the Southampton Princess Hotel. The event will have as its theme the growing international role of the island.
Lee Coppack is co-editor of Global Reinsurance and edits the publication's annual Bermuda edition which is published in May. E-mail: leecoppack@ compuserve.com.