Bermuda: A Glimpse Of Bermuda

Last Updated: 4 April 2016
Article by Michael Frith

What makes the Bermuda market unique? Michael Frith highlights similarities between regional markets and this jurisdiction.

For over 60 years Bermuda has been a prominent leader in the global insurance sector. The Island is known, in particular, for having an effective risk-based regulatory framework and a robust infrastructure that includes a deep pool of intellectual and financial capital.

As a result, Bermuda is viewed as an obvious market to place capital and is an ideal base from which to expand that capital into other markets. This position has been particularly attractive to insurers in the MENA region, as they have realized the advantages Bermuda offers and the complimentary ties that exist between the regions, when it comes to expansion.

Conyers Dill & Pearman recently held a seminar on the Bermuda reinsurance market for local industry stakeholders. Michael Frith, director at the law firm, spoke to Premium magazine on the occasion. Below is the transcript of the exclusive interview, which highlights the similarities between markets and trends to look for in the year ahead.

Do you see any similarities between the Bermuda and UAE markets?

The markets are complimentary and have a number of similarities. Although Bermuda is generally better known as a reinsurance market, it does underwrite direct insurance. Here [in the UAE], there appears to be a predominantly local direct insurance market, but with an expanding reinsurance market developing. DIFC, in particular, is also quickly developing as a regional centre for insurance and reinsurance, just as Bermuda has been over the past several decades. In addition, much like the Bermuda Monetary Authority (BMA), the market appears to have created a regulatory framework that is receptive. Jurisdictions like the DIFC and the QFC are also taking that approach, and in that respect the Bermuda development strategy is similar.

Can you tell us a little about the move of Qatar Re to Bermuda?

Essentially, we understood that Qatar Re was looking to expand its global reinsurance operations. In order to do this, they needed to domicile in a jurisdiction that was most conducive for their expansion. From their point of view, Bermuda had all of the things they were looking for. They were in favour of Solvency II equivalence, and they recognised the credibility that comes to a reinsurer operating in this kind of market. Being in Bermuda gives them extraordinary access to the reinsurers in the jurisdiction, as well as the US market, which they were looking at expanding into. From what we could see, the move was not about Qatar as a jurisdiction at all; rather, more about the advantages that could be gained by operating from Bermuda, with continued MENA exposure.

What would the procedure be if Qatar Re had to redomicile back to the Middle East?

Bermuda law allows companies to discontinue, provided that the jurisdiction they are moving to allows a similar mechanism. And companies regularly do move into and out of Bermuda, for various reasons.

Going forward, would it be sensible to say that forming partnerships between the jurisdictional authorities would be something to pursue?

Yes. One of the key aspects of global regulation that the BMA and other regulators are consistently seeking to enhance is regulator–to–regulator contact, especially where insurance groups are operating across jurisdictions. That sort of communication is absolutely essential in the group supervision context. Bermudabased insurance and reinsurance groups are increasingly looking to the DIFC to enhance their market presence in the MENA region, with companies such as Validus, Arch, PartnerRe, Catlin, Argo and even Qatar Re all establishing regional offices there. With that increased importance, the likelihood of the BMA needing to have direct contact with regulators in the region, and have them participate in supervisory colleges, will also increase. We know that the regulators here do have regular contact with the BMA already, and we would certainly expect that interaction to continue.

What trends are being witnessed in the reinsurance market with respect to alternative capacity?

The capacity provided by so-called alternative capital is an extraordinary development. There is no question that it is here to stay. It's disruptive; it has changed the traditional cycle of premium fluctuations. As an example, in 2005, when hurricanes Katrina, Rita and Wilma hit, prices hardened quickly as capacity was constrained. In that period we had new capital worth in excess of USD10 billion coming into Bermuda in a space of three months, through newly formed companies. And that sort of capital influx has been seen several times in recent decades, following major insured events. We do not expect to see that again. Instead, we have seen more nimble structures, like sidecars and Cat Bonds, develop as the alternative. These vehicles present a quicker and more efficient way to get capital in the market, without having to establish a new reinsurance operation. It has proven to be efficient, and is here to stay, and you can expect to see a lot more development of it in the coming years.

Any other general trends that are being witnessed?

It is a soft market and as such we expect that it's going to be quieter for captive development, although we're still seeing a fair number forming in Bermuda. From the Bermuda perspective, we find that we're tapping into the Latin American market, in particular, in ways that we hadn't done before. So a number of the new captives formed are from those jurisdictions.

Now that we have Solvency II equivalence, we expect that we're going to see a lot of companies in the commercial sector structuring their existing operations in Bermuda in a way that the BMA can serve as a group supervisor under Solvency II. The "hedge fund re" model for new commercial insurers has also been very active, and will continue to grow in popularity. We're probably going to see a bit more long-term business, and of course there is an extensive amount of activity on insurance-linked securities (ILS) generally. The upward trend in this segment has grown extensively over the last five to seven years. In 2015 alone, record numbers were reached. The value of ILS listed on the Bermuda Stock Exchange grew by 28 percent, valued at over USD19 billion, and we have every expectation that that trend will continue.

This article was first published in Premium Insurance, March 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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