Still true to its roots

Bermuda’s success as an insurance and reinsurance hub has always revolved around its ability to innovate. Originally the domicile of choice for captives formed by US companies during the 1960s and 1970s, the first fully fledged insurers were born there in the early 1980s in response to a US commercial lines liability crisis.

That lack of capacity and solutions on mainland US led to ACE and XL being formed—now two of the biggest and most globally influential insurance companies. They provided much-needed insurance solutions to US corporates and filled a gap in the market that was not being filled by US-based carriers.

Since those early days, Bermuda has become the natural home of many newly-formed carriers launched to fill gaps in the market. In particular, it has become known as the birth place of reinsurance carriers. A number of companies were formed there in the aftermath of Hurricane Andrew in 1992 and after September 11, 2001. They provided much-needed capacity in the aftermath of those events and gradually developed into established companies over time.

But the Island’s roots as a provider of innovative insurance capacity have not been lost. Its insurers continue to service US corporates offering innovative products and filling gaps in the market.

“The Bermuda insurance market remains a centre of innovation,” says Joseph Rego, chief executive of Aon Bermuda, who points to events such as the dislocation of catastrophe capacity and areas of emerging risk, such as cyber liability, as examples of where the Bermuda markets have been quick to respond. The market remains willing and able to innovate and adapt to new market challenges, he says.

Unique solutions

Some of the products it offers remain unique to the Island. For example, many US corporates use Bermuda to buy punitive damages coverage, a type of policy not allowed in certain US states. Because Bermuda law is largely based on English law, which does allow cover for punitive damages, insurers on the Island are able to offer this kind of protection.

Allied World Assurance Company (Allied World), for example, has launched an innovative punitive damages product called Constellation, a policy that combines a suite of five excess casualty coverages into one package.

Mike Hoffmann, chief underwriting officer at Allied World, says the policy is unusual because the risk surrounding punitive damages is unpredictable and there is a wide range of outcomes when punitive damages are awarded.

“As compensatory awards increase over time, as they have been doing, the multiplier effect of punitive damages can be quite dramatic,” he says. “Some US states allow for punitive damages to be insured and some don’t, but because we are offshore the insured doesn’t have to worry about whether it is covered for punitive damages in its specific jurisdiction. That provides insureds with some certainty.”

There are many other examples of unusual or unique insurance products developed and available on the Island. Insurer Hiscox has launched a policy called Solo Strike, which covers the cost for hospitals to defend cases of negligence when a gunman attacks a hospital. The policy also covers the cost of dealing with the situation on the ground in a physical sense, as well as the cost of dealing with the press.

“Solo Strike is unique to Bermuda. We launched it here because it is a healthcare product and the Island is where our healthcare book is centred,” says Ian Thompson, senior vice president, Hiscox in Bermuda.

Although the Bermuda insurance market has become well known for providing liability policies, it is also rapidly expanding to provide a much wider array of coverages, according to Julia Mather, head of the Bermuda office of broker Miller.

“Because Bermuda was historically set up for liability risks it is a common misconception that that is all Bermuda does,” she says. “There is a huge array of products available in Bermuda, with liability, property, professional lines, product recall, trade disruption, political risk, terrorism and healthcare being a few.”

The market also has a reputation for providing high excess capacity. But, again things have changed on the Island, with insurers offering capacity all the way up the tower for clients with different appetites, according to Mather.

Richard Peers, chief executive of the Bermuda operation of broker Price Forbes & Partners, agrees that the market has always been extremely responsive, citing the sequence of large catastrophe events that have occurred over the years, and the new breed of insurers and reinsurers that have subsequently been created as a response to those events.

“Bermuda has always stepped up,” he says. “In the casualty sector, there is probably 60 to 70 percent more capacity in the market today than there was 10 years ago and that has largely come from Bermuda start-ups.”

A place on the map

Bermuda’s constant innovation has been driven to a certain extent by its geographical location. While other established markets such as London and Lloyd’s naturally boast heavy footfall, Bermuda has needed to innovate to attract business in the first place, says Thompson. “In creating a new market, you have to provoke and sustain interest, and come up with new products,” he says.

Having spent time in both the US domestic market and the London Market, Thompson says underwriters within those markets can tend to wait for clients to approach them, whereas the market in Bermuda must be more proactive in sourcing and attracting business to the Island.

But Bermuda’s geography and isolation can also be a blessing. Due to the extremely concentrated number of companies that are present on the Island, a potential client can arrange a large number of meetings in a relatively short space of time.

“You can see a huge number of decision-makers in a very short space of time, which is not so easy elsewhere,” says Mather. “For Miller, I think the most market meetings we have managed in one day, visiting all of their offices individually, not them coming to us, was 13.”

Thompson adds that this can provide good value in terms of both time and money, allowing clients to visit insurers all in one place, rather than having to travel to various offices around the US.

“Whether you want to place a contract for a Fortune 500 company or a big personal liability contract, you can see half a dozen markets in a day,” he says. “It’s a pretty cost-effective way of getting it done, as opposed to having to go to St Louis and then Miami and Atlanta.”

For those clients who do make the journey to Bermuda, the market can also offer the opportunity of building long-standing relationships between the insured and the insurer. This is of significant value to clients, and the Bermuda market has been commended for its consistency, according to Mather.

“Clients come to Bermuda to renew their policy every year and every year they see largely the same people,” she says. “The ability to build those relationships and not to have to start at the beginning every year is important when what you are selling is a promise to pay at some arbitrary point in the future.”

Peers agrees that the chance to build long-standing relationships is growing in importance, adding that insurance buyers are becoming far more sophisticated, in terms of what companies are buying, why, and from whom.

“Whether you want to place a contract for a Fortune 500 company or a big personal liability contract, you can see half a dozen markets in a day.”

“There is a desire for people to maintain long-standing relationships, as well as to diversify and spread their risk,” he says.

Quality personnel

Clients coming to Bermuda can also benefit from the high standard of executives who work in the market. This quality is driven by many factors, not least the fact that it costs a great deal to relocate staff to the Island. Therefore, to make that expense worth it for the insurer, those staff must be of the highest quality.

“If you’re going to bring somebody over they have to be worth it,” Thompson says. “I think there’s definitely a level of experience in the Bermuda market which is stronger than anywhere else.”

Bermuda also offers a wide selection of different kinds of coverage for corporate clients. Mather points out that Bermuda is one of the only places that buyers can meet with insurers, reinsurers and captives, providing them with a ‘one-stop shop’.

“When coming to Bermuda for your captive meetings, how convenient to be able to get the reinsurance for your captive on the doorstep, while also placing hundreds of millions of dollars of cover on your liability or property or D&O risks,” she adds.

Mather says it is the lean structure of companies on the Island that has allowed them to weather the cyclical nature of the insurance market so well over the years. Rego agrees that Bermuda has remained resilient to cyclical pressures and, while acknowledging that there has been an ebb and flow of premium over time, he says that the corporate client base has remained stable for several years.

“You’ve occasionally seen repositioning in response to the competitive environment. The attachment point of the market in Bermuda may ratchet upwards—and, in some circumstances, downwards—depending on how the global marketplace is reacting to different situations,” he says.

This resilience is also now being demonstrated by the pure volume of business coming into Bermuda from corporate clients. Increasingly severe natural catastrophes, coupled with growing uncertainty in economies, are leading companies to want to transfer more of their risk, according to Peers. “Insurance buying is only going one way: up,” he adds.

Others have observed different levels of demand for insurance depending on the particular line of business. The very nature of the insurance cycle means that certain lines of business may be hardening, and so some companies in other jurisdictions will back away from it, resulting in more business flowing into Bermuda. Conversely, some business may repatriate back from Bermuda to either London or the US. “This makes it hard to characterise,” says Hoffmann.

He is, however, optimistic for Bermuda’s future, adding that the market continues to evolve to meet the challenges it faces. These include the same challenges that any market faces, namely remaining viable and finding its niche for certain lines of business where it performs strongly. Given Bermuda’s history as both a reactive and proactive market in terms of innovation, the market appears set for the future, whatever the challenges it faces..