Allied World, Arch Re, Axis Specialty, DaVinci Re, Endurance Specialty, Montpelier Re. All are new risk carriers set up in the wake of September 11, and all have been established on Bermuda. Still more new outfits have been set up, though without the fanfare of the $1bn+ new players: Olympus Reinsurance Ltd and Queens Island Reinsurance Ltd are the two latest to come to light. And in addition to the newcomers, existing players raised substantial amounts of capital from the investment community to beef up their already substantial operations. But the question remains, why did these investors decide on Bermuda as the destination for their capital?

Captive talent
Back in November, Donald Watson, a director of Standard & Poor's in New York, suggested that Bermuda and Dublin, as low-tax domiciles, would be significant players in the new capital stakes. "A critical mass of talent has built up in Ireland, and the region has much to offer start-ups. Bermuda will also see a healthy influx, with its one-hour time lead over New York working in its favour," he commented at the time. "Nevertheless, start-up reinsurers are unlikely to fare as well as in previous market turns due to the strong level of capacity that remains among property/casualty insurers and reinsurers."

As it transpired, Bermuda emerged the definite king in the new player stakes, and there are a number of dissenters to Mr Watson's view that the recent wave of start-ups will not see the returns experienced in previous market turns.

Bermuda's kick-start into the world player stakes started with the US liability crisis in the mid-1980s. As excess liability cover became almost impossible to buy, a number of Fortune 500 companies decided to tackle the problem; 34 of them formed ACE in 1985, then a year later EXEL (now XL) was set up by 68 Fortune 500 companies. Both immediately became large writers, posting limits of $100m xs $100m.

Hurricane Andrew in 1992, the biggest insured loss until last year, triggered the second wave of company formation on Bermuda, as property catastrophe cover became impossible to purchase from the traditional markets, and the recent withdrawal of capacity has helped catalyse Bermuda's third wave.

About $6bn has gone into backing the newest arrivals on island, while established players such as ACE, XL and Renaissance Re have been raising capital to boost their positions in what is possibly the fastest-hardening market ever experienced. But not everyone subscribes to the policy of welcoming new capital with open arms. Some major industry players have warned that the new capacity entering the market may be a case of too much, too soon. In a letter to shareholders dated November 9, Warren Buffett, Chairman and CEO of Berkshire Hathaway, commented, "an absolute flood of capital - much put up by unsophisticates - is pouring into the insurance industry. (Investment bankers and promoters may not know which businesses will succeed, but they certainly know which can be sold.) You can be sure these funds will be deployed, whatever the level of rates. Consequently, any period of strong pricing will almost certainly end within a year."

Unsurprisingly, there are dissenters to this view. Don Kramer, Vice Chairman of ACE Ltd, pointed out that the $17bn-$19bn which has entered the industry in recent months is less than the amount of capital which exited earlier in the year. "The US domestic industry lost around $20bn going into June 2001," he said. Add to this the $35bn-$50bn in claims expected from the WTC loss, and the new capital has barely dented the outflow. "The overcapitalisation of a year ago has righted," said Mr Kramer.

Changing perceptions
There is little dissent that the events of September 11 have changed the general perception of risk. "There is a new paradigm of risk with terror," commented Mr Kramer. A previously invisible web of interconnected covers was revealed by the terrorist attacks - business interruption claims were logged from Midwest companies, as a results of airports being shut immediately following the attack, while the huge clash of coverages was "astounding," in Mr Kramer's words. While some markets frantically tried to assess exposures, losses and the changed nature of insurance, Bermuda stole the march on accessing investment markets and other capital sources.

"Bermuda came through with new capacity each time there was a crisis," said Mr Kramer. "Bermuda was created in periods of shortage - we have only been there when they needed us," and it has the added flexibility of allowing the quick establishment of new operations. Where it would take on average six to nine months to establish a reinsurance operation in the UK, on Bermuda new reinsurers can be up and running in six to nine weeks.

But where as Bermuda isn't suffering a reinsurance capacity crunch, it may find itself squeezed on the infrastructure capacity, as well as a shortage of skilled practitioners. So far, the new companies have been headed by well-respected market figures such as Jack Byrne, Tony Taylor and John Charman. Filling posts further down the corporate ladder may, however, prove more difficult. "We are mindful of that," said Mr Kramer. "Qualified Bermudians should fill posts," as per local law, and Bermudian companies and organisations such as the Bermuda Foundation for Insurance Studies have set up training and scholarship programmes to encourage Bermudians to access the industry. Nevertheless, the international re/insurance community is limited in the number of truly gifted individuals in the marketplace, despite the truism that a stint in Bermuda is now seen as a resumé builder rather than a career risk.

To a certain extent, the very nature of the business undertaken on island prevents the international skills shortage becoming a serious problem. "It is not a labour-intensive business," commented Mr Kramer, and Bermuda-based organisations cannot enter the commodity end of the business successfully; while there is no income tax on island, it is effectively replaced with a `consumption tax' which leads to a high cost of living. And on a densely populated island of about 60,000 inhabitants, infrastructure strains are a nagging issue. Housing is in short supply and is extremely expensive, while schools and roads are pushed.

But, countered Mr Kramer, the types of businesses established in Bermuda are not people-rich. ACE is a holding company with worldwide offices, its operations stretching from the US through London to Asia, with a new unit currently being established in India. Axis is expected to set up a European operation in the near future, and doubtless will not be alone in this strategy.

Bermuda's economy is now highly reliant on the re/insurance sector; it is the highest revenue earner on the island, with the investment market in second place and tourism falling into the bronze position. A government initiative providing financial incentives for hotels wanting to improve their facilities has fallen by the wayside since September 11, and about 30% of tourism revenue is now accounted for by business travel. The massive drop-off in US leisure travel has hit the island, with substantially lower numbers of tourists choosing Bermuda as their vacation destination, though cruise numbers remain constant, according to Richard Calderon, new CEO of the Bermuda International Business Association. Even so, cruise passengers are not generally viewed as big spenders, meaning Bermuda has an even higher dependence on the continuing success of its re/insurance powerhouse reputation.

Death of retro?
Current re/insurance market conditions could easily lend themselves to that reputation being maintained, or even extended. As Bermuda and London vie for the position of the world's second largest market, opportunities are being leapt on wholeheartedly by the Bermudians. Whereas in the past, a company would take a $200m limit and cede out $75m, it is now taking $25m on a coinsurance basis and keeping it all, explained Mr Kramer. Yes, it is "opportunistic", but it does not detract from the capacity being available if the customer wants to buy. That prices have shot up is also not in dispute; he cited examples of classes such as aviation increasing by 400% or more, though the more regular 20% to 30% rate increases were accompanied by suitable increases in deductibles, as well as terrorism exclusions. But the point is that Bermuda has been able to offer cover, despite the death of the retro market, and with new players generally coming in at the $1bn+ level, it has also been able to offer strongly-rated capital.

Whether the deluge of new formations will continue is unclear. At the time terrorists hit the US, capital was awash in the investment community, a community disenchanted with many previously strong investment areas. Along came a new risk world, and in poured the investment dollars to the re/insurance sector. Since then, tech stocks have been coming back into fashion, said Mr Kramer, and could pull spare capital away from the re/insurance market. At the same time, analysts in the investment houses are vacillating between being enticed by the re/insurance sector and being put off by the volatility inherent in the business, as well as the uncertainty surrounding aggregate exposure levels from catastrophic losses, particularly of the manmade variety.

And how long this particular upswing will last is also in question. In Mr Kramer's analysis, the re/insurance sector is "in extreme conditions now", and next year will be characterised by increases of inflational loss costs. Others take a longer-term view, predicting an inexorable upward rise in rates, and tightening of conditions for the next couple of years at least. With the market so young in the new risk environment, it is difficult to use the patterns of the past to predict the future; only time will tell at the moment. What is more sure is the increase in captive use by corporates needing to deal with greater levels of self-insurance. Last year, 34 pure captive operations - Class 1 and Class 2 companies - were set up in Bermuda. However, a significant number of the 53 new Class 3 insurers are likely to be captive operations, so the increase in captive numbers over the course of 2001 is likely to be higher. "We are seeing a lot of interest in new captives and utilising existing captives," observed Alan Cossar of Aon Insurance Managers (Bermuda) Ltd. In particular, corporations are looking to their captives to manage the increased retentions characteristic of the renewals, and Mr Cossar expected the interest levels to continue over the course of the year. "A lot of corporations are still digesting the January 1 renewals," and what the renewals mean in terms of risk profiles and exposures, he said.

Regulatory changes
Like many of the offshore jurisdictions, Bermuda kept a close eye on the KPMG review of financial regulation, issued in October 2000. As a result of recommendations in the report, last August saw changes to the Insurance Act, shifting regulatory and supervisory responsibility to the Bermuda Monetary Authority from the Registrar of Companies in the Ministry of Finance. This means that supervision is "now more politically independent," said Ifor Hughes, Assistant Financial Secretary for international business. Jeremy Cox, the Registrar of Companies, is to become Supervisor of Insurance, and the Bermuda Advisory Committee is to be retained.

While Bermuda enjoys its reputation as an accessible jurisdiction, it is at pains to ensure it doesn't leave itself open to criticism over regulatory standards. Bermuda has "transparent regulation", according to ACE's Mr Kramer, operating on a "know your customer, know your market" basis. The authorities will pull a licence if an organisation does not meet the requirements, he said. Indeed, it was the Bermudian regulator that pulled the plug on Australia-headquartered NewCapRe, the first step in the collapse of the Antipodean reinsurance sector. But that was in the days of overcapacity and intense competition. Now the international industry has been transformed, and Bermuda is positioned high in the field of front runners.

By Sarah Goddard

Sarah Goddard is the editor of Global Reinsurance.