September 23, 2014

Michael Frith: Insurance Is Big Business

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Go to any city in the world, and look for the grandest or most iconic modern building there. Chances are it’s owned by an insurance company.

And why is that? Because insurance is big business. In a world fraught with uncertainty and insecurity, insurance is the hedge against those unknowns.

Bermuda is no different. On an island ringed with centuries-old fortifications, standing sentinel in the middle of the Atlantic Ocean, we have long understood global security.

In the modern age, insurance, and the security that insurance provides, has shaped the Island and its economy into a powerhouse. It is an industry we know well, and the world has come to rely on that understanding, and the innovation that it fosters.

As the global financial markets have been put under historic strain in recent years, Bermuda has not been immune. There have been lost jobs, falling property values and financial pressures. The waves of the global financial storm have battered our shores just as they have around the world.

But Bermuda has provided a safe harbour. The Bermuda-led insurance industry has continued to provide the security that the world needs to weather the financial storm, and now that the tempest is showing signs of subsiding we stand ready to lead new growth once again.

Bermuda has the experience and the infrastructure to make it happen.

Bermuda has long been one of the most significant reinsurance markets, underwriting approximately eight percent of all global reinsurance business (doubling the four percent written a decade previously). In the property catastrophe reinsurance market, we are even more dominant, writing upwards of a third of all global P&C risk.

Bermuda insurers reported underwriting capital (defined as shareholders’ equity plus total debt) of $117.74 billion and net premiums written of $61.55 billion for 2013, representing an increase of 21% and 23% respectively from figures recorded, in 2009.

The Bermuda Monetary Authority 2013 annual report also reveals some remarkable statistics. For instance it states that ‘ILS structures issued by Bermuda-domiciled SPIs, and worth $4.7 billion, represented an increase of 89% compared to 2012’.

It reported that ‘the number of new insurers registering in Bermuda increased by 72% year-on-year in 2013’ and that ‘a total of 91 new companies joined the register compared to 52 in 2012’.

The BMA report also showed that the number of new captives registered in 2013 was double the number recorded in 2012 and that a record number of Special Purpose Insurers (SPIs) were formed.

Interestingly, according to the BMA, ‘in 2013 Bermuda surpassed the Cayman Islands for the first time since entering the ILS market in both the number of deals issued and total issuance volume’, thanks in no small part of the specially created new class of special purpose insurers (SPIs).

ILS is very strong on the Island, with the specially-created SPIs now representing the largest single class of new registrations, having developed from a standing start in 2009.

The regulator’s efficient and pragmatic approach to the development of the SPI vehicle has been of enormous benefit, but without a bona fide market to fit into, SPIs are nothing. Bermuda provides that market.

Bermuda has become, in the space of less than five years, the largest issuer of cat bonds globally. Add that to the indisputably heavyweight captive and commercial insurance sectors and the Island’s long-held dominance in sidecar and collateralized insurance structures and you can see why Bermuda is an insurance powerhouse.

Even the investment funds business is seeing a resurgence of activity, led in part by the proliferation of ILS-specialised funds.

The outstanding amount of ILS issued in Bermuda represents 49 percent of the worldwide stock of ILS. With the global stock of ILS products sitting at $20 billion at end Q1-2014, Bermuda-based SPIs sponsored $9.7 billion of this total (BMA ILS Market Report, May 2014).

Adding some real punch to the infrastructure fight, the Bermuda Stock Exchange (BSX) listed more than 47 percent of the global market capitalisation of insurance-linked securities at the end of Q1-2014.

A total of 46 ILS products (comprising 60 tranches) are listed on the BSX with an aggregate nominal value of approximately $9.5 billion. (BMA ILS Market Report, May 2014).

If you look at Cat bonds, issuances have remained steady in volume in recent years, with 28 issuances in 2011 and 29 in each of 2012 and 2013.

However, what is of note is the increase in value of these issuances: In 2011 it was USD 4.5 billion; 2012, USD 5.75 billion; 2013, USD 7.1 billion; and 2014 Q1 & Q2, USD 5.9 billion.

According to The Actuary, July 10, 2014: “The first quarter of the year saw $1.4bn of catastrophe bond issuance. Combining this with second quarter figures, the ILS market saw a record first half 2014 issuance of $5.9bn – exceeding the prior year period by almost 50 percent.”

If you examine the figures by jurisdiction you will see that in 2012, 38 percent of Cat Bond issuance was from vehicles domiciled in Bermuda, while in 2013 that figure increased to 86 percent. So far, 2014 is showing a similar trend with 82% of cat bonds issued from Bermuda in Q1 and Q2.

In terms of Captives, 2012 saw 16 Captives registered, 2013 saw 36 Captives registered (almost a 50 percent increase) and 2014 has seen 15 Captives registered so far.

There are also some very substantial commercial insurer formations, with some large Class 3B and 4 companies registered or in the process of registration.

Significantly, there are more companies forming that have a definite interest in establishing a physical Bermuda presence. Whether they be specialized ILS investment funds or traditional property catastrophe reinsurers, they are clear on where the talent and innovation can be found – Bermuda.

So why is this happening? Bermuda has a strong market with an excellent infrastructure as well as a large pool of highly skilled people essential to moving the insurance sector forwards.

Bermuda law and regulation leads the global standard, evidenced by the strong reports emanating from our EIOPA assessments for Solvency II equivalence and our early recognition as an NAIC approved jurisdiction.

Bermuda is also a very significant and active participant on the International Association of Insurance Supervisors (IAIS), ensuring that we are not only apprised of global regulatory developments, but that we are leading the way in establishing the global standard.

The BMA is a very accessible regulatory and, importantly, very pragmatic and commercially-minded. It has long taken a risk-based approach to regulation, and in an industry whose very raison d’etre is risk management, isn’t that the most important quality to look for?

With this background in mind, I predict that we will see a continued, indeed an increased dominance in ILS even in the face of greater jurisdictional competition.

We will also see an increase in commercial insurers on the Island; not the “waves” of new entrants experienced following the events of 2005, 2001, but instead a steady – and stable – stream of commercial insurers, led by particular interest from major life insurers and hedge-fund backed reinsurers.

We will also continue to see the formation of new captive insurers on the Island – risk management remains as important as ever to global business and there is no better place to form and manage captive than Bermuda.

We do not foresee any major regulatory changes in the near term, other than developments in the area of enhanced policyholder protection and perhaps further enhancement to commercial and ILS regulation and to the regulation of insurance intermediaries.

The industry, the regulator and various Government departments are all working hard to provide a welcoming, responsible business environment. There is still a lot of work to be done but there is no doubt that there are very positive signs of growth out there and Bermuda provides the ideal environment for it.

[Column written by Michael Frith, a director at Conyers Dill & Pearman Limited’s Bermuda office and a specialist in corporate insurance and regulatory law]

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