The groundwork for the Bermudian insurance industry was laid by some remarkably persistent pioneers, writes Roger Crombie.

Since 1947, when AIG established the first Bermuda international insurance office, the Island’s economic growth has been almost uninterrupted. The executive summary of the effect of insurance on what was a small fishing village can be told in a single statistic: GDP per capita has risen from (effectively) zero in 1947 to north of $80,000 today, the highest in the world.

Capital and talent have arrived on the Island’s shores with much the same consistency as the waves. Ideas have sprung forward and been embraced by the world. Alternative risk transfer, Bermuda’s firstborn child, now accounts for more than half of North American risk coverage. Reinsurance, the second child, was adopted from American parents who couldn’t care for it.

Most Bermuda observers are familiar with the waves of dollars and intellectual capital. Only a few, however, know about the early days, when an informal but determined band of men established captive insurance. They faced down titanic opposition. Here are a few of the more amusing highlights of their struggle.

Dateline: the mid-1950s. David Graham, a British lawyer, was hired by Conyers Dill & Pearman (CD&P) to replace founder Reggie Conyers, who had died in a boating accident, having earlier had a hand in inventing the exempted company. In 1956, Graham famously wrote a letter to The Times in which he pointed out to shipowners, then chafing under heavy taxation, that vessels on the Bermuda Register were effectively British, yet their owners paid “no taxation at all”. Cue those whirling newspapers you see in the movies, with headlines such as “World’s fleet Bermuda-bound”. Graham, whose practice until then had been managing the financial affairs of a few wealthy clients such as Noel Coward, essentially created the offshore jurisdiction and set the stage for all that followed.

A few years after that, Bill Kempe, the newest partner in CD&P’s emerging rival, Appleby Spurling & Kempe (now Appleby), was in Britain. He had been landing mutual fund clients from one of the merchant banks and had accepted an invitation to a weekend gathering at the home of a wealthy client outside London. It must have been a very P.G. Wodehouse sort of affair, without the dramas of Gussie Spink-Nottle and Aunt Agatha. One of Kempe’s fellow guests was an American — an exotic species in the Home Counties at that time — by the name of Fred Reiss.

Like Graham, Reiss was a man chock full of energy. He was also in possession of a Big Idea, as yet unrealised. Reiss was an insurance agent. Some of his steel mill clients operated coke and iron ore mines that, instead of selling their output to the market, pulled ore from the earth for their owners only. The mines were called ‘captives’. Reiss wanted to extend the idea into the world of insurance.

He ran the notion past Kempe, who suggested that Reiss base his captives in Bermuda, where taxes were levied on consumption rather than income. The deferred tax advantage, plus a regulatory environment that was, shall we say, relaxed, might afford Reiss’s ‘captives’ the missing edge.

Kempe recalled Reiss’s face lighting up. Kempe told Reiss that he’d be back in Bermuda in a couple of weeks, but Reiss couldn’t wait. When Kempe returned to his office, Graham called to tell him all about what he and “that fellow Reiss you sent to see me” had been able to achieve. In today’s cut-throat world, Kempe would have been done out of a livelihood, but once captive insurance took off in Bermuda, there was so much business to go around that Graham shared the spoils with Kempe. The two law firms developed into the world’s largest offshore legal enterprises.

After a number of false starts, Reiss partnered with Graham in an attempt to market the idea of Bermuda captives. No one wanted to be first. Potential clients told him to come back when he had one going, and any potential US tax issues had been worked out, and said they’d be delighted to start the second.

By the mid-1960s, Reiss had started a few captives. Their premium income was tiny, but word got around. Graham was summoned to the US by the founder of one of the largest insurance brokers, a man he knew somewhat. The broker feared disintermediation: brokers being cut out of business placed through captives. If you think about it, the fear made sense. Why would a company pay a broker to place insurance with itself?

Graham was told point blank that the idea of Bermuda establishing a captive insurance business was to cease forthwith — or the brokers would form a Washington, D.C. lobby group to kill the captive insurance industry before it could get off the ground. The broker would not listen to reason.

TRUMP CARD

Back in Bermuda, Graham and his colleagues formulated a plan. He returned to the States and spoke, not to the founder of the company, but to a man a rung or two down the ladder, with whom he had done business in the past. Captive insurance would take hold sooner or later, Graham said, somewhere in the world. Given the specific nature of risks which could suitably be transferred to a captive, he argued, the idea was unlikely to affect the ordinary insurance business of the large American insurance companies. And then Graham played his trump card: reinsurance. Business written in Bermuda, he pointed out, would eventually work its way back to existing carriers, guided as ever by the sure hands of brokers. Graham carried the day. The lobby group was shelved, the brokers flourished and later developed captive management facilities. History proved Graham right.

Next to object: the insurers. Graham received a call from a representative of a leading company who had been told by his Home Office to have nothing to do with captive insurance. Would Graham care to visit New York to discuss the future?

He and Reiss flew up to Idlewild, now JFK, where police officers boarded the flight and took the two men off under armed guard. They feared the worst, but were delivered intact to the office of the insurance executive they were to meet. The company, which went on to become one of the largest American corporations in history under the sure hand of this very executive, was on the brink of closing its Bermuda office, but wanted to understand the plans for captive insurance before making its decision.

This time, Reiss proved persuasive, and the company stayed in Bermuda, becoming the Island’s largest insurance entity for the next 35 years.

Bermuda’s debt to these pioneers is immeasurable. They are all gone now, but their exploits laid the groundwork for a very different Bermuda than the one they knew.

Roger Crombie is a chartered accountant living in Bermuda.

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