The Bermuda market is in the midst of a dramatic transformation. New and innovative products are being developed to satisfy the needs of risk managers and insurance/reinsurance companies. In addition, mergers and acquisitions are taking place at an ever increasing rate. Kymn Astwood explains how Bermuda's shared regulatory system continues to adapt to ensure that the prime objective of protecting the interest of policyholders is always met.
Bermuda is a spawning ground for new and innovative insurance vehicles that satisfy the needs of customers from around the world. This statement is supported by the fact that during 1997, Bermuda formed 93 new companies, which is the fourth consecutive year that Bermuda has seen formation activity in the 90s. The number of new companies added during 1997 demonstrates the Bermuda market's ability to develop new products that attract business in a time of predominantly soft insurance markets.
The needs of customers are changing as corporate risk management continues to evolve from managing traditional event risk (fires, accidents) to a broader mandate of protecting corporate assets and earnings from all forms of enterprise risks (event, financial and business risks). To address this need, the Bermuda market is developing many more products that tailor long term, holistic risk solutions to a customer's specific world wide enterprise exposures.
Competition from financial services firms
Increasingly, financial institutions such as investment banking and securities firms are growing eager to tap into the potential revenue associated with providing risk management solutions. This development has resulted in significant interest in the convergence of insurance markets and capital markets; a process which is often referred to as the securitisation of insurance risk. Bermuda is positioning itself to become the leading domicile for this emerging market.
One example of how Bermuda is responding to this challenge is the formation of The Bermuda Commodities Exchange, which is designed to facilitate the exchange of insurance risk in a manner similar to the trading of securities on a stock exchange. Also, various other vehicles have been formed that are designed to act as transformers. Transformers are special purpose vehicles (SPVs) that issue securities to investors on the one hand and provide insurance and reinsurance capacity using these funds on the other. The return on the securities issued to investors is normally linked in some way to underwriting performance. In March 1998, Goldman Sachs, an international investment banking and securities firm, announced that they had formed such a vehicle in Bermuda called Arrow Re.
To compete effectively in this increasingly global competitive market, where competitors include "global financial supermarkets", certain Bermuda companies have embarked on an aggressive merger and acquisitions strategy. This approach is based not only on long term corporate survival, but also on the desire for economies of scale and more efficient distribution systems. It also reflects a desire to achieve better spreading of risk, as cited in EXEL's planned merger with Mid Ocean. This deal was widely regarded as a good strategic fit, matching EXEL's long-tail liability insurance risks with Mid Ocean's predominantly shorter-tail catastrophe reinsurance exposures.
Regulators from around the world are discussing various supervisory issues that arise from the continuing emergence of financial conglomerates and the blurring of distinctions between the activities of firms in the various financial sectors. In Bermuda, these issues are also being looked at very closely. In fact, a special committee has been set up to contemplate the future and make recommendations concerning how Bermuda's shared regulatory system needs to adapt over the next three to five years. A first step to deal with the issue of the convergence of the insurance and capital markets has already been made with the passing of the Insurance Amendment Act 1998.
The Bermuda government has amended its insurance legislation in a bid to help the island become the leading market for the convergence of insurance and capital markets. The main purpose of the Insurance Amendment Act 1998, which is believed to be the first of its kind, is to remove any uncertainty as to whether an investor in a securitised instrument is engaging in insurance.
Uncertainty as to the legal standing of certain contracts under law can adversely affect the ability of companies to raise capital for securitisation deals. For example, linking an investment contract such as a bond to insurance results raises questions about its legal classification. This is important where capital is coming from institutional investors that want to know whether they will be deemed to be conducting business as insurers under law. We view the Insurance Amendment Act 1998 as part of an evolving legislative process which is dealing with an evolving industry.
In February 1998, The Basle Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors (IAIS) announced the release of consultation documents on the supervision of financial conglomerates prepared by the joint forum on financial conglomerates. These papers address important issues affecting supervisors in the banking, securities and insurance industry relating to financial conglomerates. Through Bermuda's membership in the IAIS, we have received and are reviewing these and other papers to keep fully abreast of international regulatory standards. In addition, we are monitoring developments in the United Kingdom as they lay the foundation for the creation of a new single financial services regulator.
It is a harsh fact of modern business life that competition is intensifying in every market, and the Bermuda government in general and the registrar of companies in particular recognise that they have a major part to play in maintaining Bermuda as one of the world's leading insurance markets. How do we do that? We do it in part by providing better value for money, principally by offering greater efficiency through more and better use of computer technology. To ensure that Bermuda maintains its competitive edge, plans are now afoot to implement electronic commerce in the Bermuda insurance industry.
One piece of the puzzle is the Bermuda Lotus Notes Private Network (or Bermuda Connect), which is a centralised application and mail server that enables an association of trading partners to conduct electronic commerce. The registrar of companies is now communicating with Bermuda Connect members on a secure basis using e-mail. In addition, we are currently testing a custom built Lotus Notes application that will enable us to receive applications for regulatory approvals electronically and process them more efficiently by making greater use of technology. The system also enables the precise tracking of applications through the approval process and compares response times to pre-determined targets.
Another component of our strategy is a website designed especially for electronic commerce. Developed using Lotus Notes Domino technology, this site will allow service providers to reserve company names on-line and submit their statutory financial returns electronically. It will also allow service providers to review on-line the status of their applications submitted. This website will initially be deployed on Bermuda Connect only; it will be available on the web once internet security concerns have been fully addressed.
Another piece of the puzzle is the Bermuda Insurance Data Service or BIDS for short. This service is being promoted by a group of Bermuda reinsurers and is designed to ensure that Bermuda remains time-competitive when bidding on new business. The system would allow brokers from around the world to submit details of their submission to a secure website. The brokers would then have the option of choosing the reinsurers they want to submit bids. These reinsurers would then be sent an e-mail informing them of the existence of the submission, and they would either review it at the site or download the files they want. Once a reinsurer has made contact with the site, the broker would be automatically notified by e-mail.
Bermuda Connect and BIDS are just two examples of the move to make Bermuda a "technology island". Our ultimate goal is to make the island one of the most technically advanced jurisdictions in the world.
Change - the only constant
We expect continued growth in the global insurance and reinsurance marketplace where there is only one constant, and that is change. Indeed, change in the world's insurance markets has been the main engine for the growth in the Bermuda market. As we approach the next millennium, the challenge for Bermuda regulators is to remain alongside the innovators of the industry so that our regulations keep pace with a changing world.
As the chief insurance regulator of the Bermuda insurance market, my prime objective is to protect policyholders while, at the same time, ensuring that our regulatory system makes sense from a business perspective as well as a regulatory perspective. Bermuda's shared regulatory system has the necessary tools, techniques and expertise to achieve this objective and accommodate the private sector innovation that has made the Bermuda insurance market what it is today.
Kymn Astwood is registrar of companies, Bermuda. Tel: (1) 441 297 7578; fax: (1) 441 292 6640.