Opinion: How Bermuda turns uncertainty into opportunity

Countries around the world are facing a period of heightened uncertainty as a result of major political decisions on both sides of the Atlantic, and in Bermuda the focus is on how these changes could affect the island’s most important industry - insurance and reinsurance.

The decision last summer of British voters to leave the European Union (EU) caught many observers by surprise. The Brexit decision has the potential to change the dynamics of how both the EU and the UK do business. In Bermuda, there have been a number of very positive developments that have allowed the Island to position itself well to take advantage of some of the current global uncertainties around Brexit.

Last year, Bermuda achieved the major milestone of being granted equivalency with the European Union’s Solvency II capital standards regime. As a result, this may allow Bermuda to provide UK reinsurers with the opportunity to sell reinsurance into Europe in the event that the UK loses its Solvency II status. There is still little clarity about what the UK (re)insurance market’s relationship will be with Europe post-Brexit and many businesses are weighing up a variety of contingency plans. However, Bermuda has an established track record of nurturing and growing global reinsurance brands and it will certainly be on the radar of London-based carriers as they try to plot a way forward after Brexit becomes a reality.

The election of Donald Trump as US President is causing anxiety in many business circles, and Bermuda is not exempt from these changes and challenges. International alliances that have been stable for decades now have question marks hanging over them.

The Bermuda re/insurance market’s biggest customer is the United States, and President Trump’s ‘America first’ approach to business may have ramifications for the Island. It is possible that traditional carriers which have a Bermuda holding company may feel under pressure to redomicile to the US if most of its business is written in the United States.

In addition, the current US administration appears now committed to significantly lowering corporate tax levels. Fitch Ratings warned in January that the public policy shift in favour of the US and a lower corporate tax rate “could reduce Bermuda’s market benefits”, and to add to this S&P stated in early February a lower rate could also result in Bermuda companies potentially having to reassess their choice of tax domicile.

The exponential growth of the insurance-linked securities (ILS) sector in Bermuda is a perfect example of how the Island has been able to take advantage of the evolution of alternative risk transfer products to create a new market

Bermuda, like every other country, needs to be alert to the changing world order and ensure it is nimble enough to respond adroitly and navigate through these uncertain times. The Island has an outstanding track record of innovating time and again, which suggests it has the ability to reinvent itself once more, if need be, to retain its position as the world’s Risk Capital.

Those that can bend with the wind, can weather the storm. Bermuda is a sophisticated, well-regulated and highly efficient business jurisdiction, and many of these challenges could also present significant opportunities for the Island. Bermuda is a well-regarded and attractive territory as evidenced by the level of merger and acquisition (M&A) activity in 2016, with no shortage of international buyers ready to snap up Bermudian carriers or vice versa. ACE acquired Chubb and adopted the Chubb name, while in another significant deal, Japan’s Sompo acquired Bermuda-based Endurance Specialty Holdings and XL Catlin was formed from the merger of XL Group with Catlin.

The exponential growth of the insurance-linked securities (ILS) sector in Bermuda is a perfect example of how the Island has been able to take advantage of the evolution of alternative risk transfer products to create a new market. In 2009, the Bermuda Monetary Authority (BMA) took a conscious decision to help grow the ILS market by streamlining the way that ILS products such as catastrophe bonds are created. Today, more than 100 ILS are listed on the Bermuda Stock Exchange (BSX) – representing close to 50% of current international issuances – with value of more than $13bn.

Bermuda is a mature centre of (re)insurance excellence with a high concentration of talented industry professionals backed up by a political and regulatory commitment to develop the jurisdiction

Technology continues to develop at a rapid pace, posing a number of difficulties for traditional insurance and reinsurance companies. Carriers will have no option but to embrace change if they want to remain in business. This may lead to short-term pain in the form of job losses if re/insurers are able to cut back on costs, but again there may be scope for those who really innovate to thrive.

Bermuda is a mature centre of (re)insurance excellence with a high concentration of talented industry professionals backed up by a political and regulatory commitment to develop the jurisdiction. As an example, the BMA recently signed a memorandum of understanding with the European Insurance and Pensions Authority (EIPOA).

The soft reinsurance market shows no sign of changing any time soon, but the ILS space is likely to grow, and Bermuda is clearly the jurisdiction of choice for the forming and listing of this asset class. It is also probable that there will be an increase in longevity swap business coming out of the UK, Europe and Canada, and Bermuda is again poised to take advantage.

Bermuda, like many countries, is facing an uncertain future. However, there is reason for optimism. The Island has repeatedly demonstrated that it is not entirely at the mercy of the fates and can take comfort from the fact that it weathered many storms over the past four centuries and flourished.