Bright year in prospect for Bermuda insurance market
by Jonathan Kent
Devastating catastrophes tend to inspire a new appreciation for the value of insurance. So it has proved this year with the monumental impact of the Covid-19 pandemic, on top of a higher than average incidence of natural disasters, such as hurricanes and wildfires.
Rates for insurance and reinsurance were rising before Covid-19 unleashed itself on the western world and most in the industry expect that hard market will last throughout 2021 and beyond.
In the words of Richard Brindle, chief exec- utive officer of Bermudian reinsurer Fidelis, this is the first real hard market since 2002, which followed the 2001 terrorist attacks on New York and Washington.
Rates had risen briefly after some of the major losses of recent years, but any nascent rising trend rapidly fizzled out. Some have at- tributed the smoothing out of the reinsurance cycle’s traditional peaks and troughs to the growing insurance-linked securities market. But three years of above-normal catastrophe losses, with loss creep meaning claims from previous events continue to climb, have left much capital “trapped” in ILS – one of several factors driving today’s hard market.
For Bermuda, the insurance pricing spike is a welcome silver lining during tough eco- nomic times. According to Maamoun Rajeh, chairman and chief executive officer of Arch Worldwide Reinsurance Group, the industry has seen inflows of about $12 billion this year, much of it coming to Bermuda.
Most of the new money has been raised by existing companies. The likes of Renais- sanceRe, Fidelis, Arch Capital, Hiscox and Lancashire Group have raised billions be- tween them through sales of debt or equity.
There are also some start-ups in the pipeline. These include the new Class 4 reinsurer being set up by Lloyd’s insurer Chaucer, which is owned by China Re, and Vantage, a start-up headed by former Arch chairman Dinos Iordanou and former Axa XL CEO Greg Hendrick, reportedly with about $1 billion in initial capital.
Then there is Conduit Holdings, which raised $1.1 billion in an initial public offering of shares on the London Stock Exchange with the aim of setting up a new Bermudian reinsurer. Conduit was founded by industry veterans Neil Eckert, who will be the new company’s chairman, and Trevor Carvey, one of the founding underwriters at Arch Re Bermuda, who will be CEO.
Add to that Convex Group, the new re/ insurer set up last year by Stephen Catlin and Paul Brand with $1.7 billion of committed capital, a company that will be moving up the gears towards top speed in the coming months, and it is apparent that the Bermuda marketplace is looking more buoyant than it has done in years.
Bermuda has seen nothing like this since 2005, when companies including Validus Holdings, Flagstone Re and Ariel Re launched in the wake of hurricanes Katrina, Rita and Wilma. This year’s flurry of activity follows a prolonged period of consolidation for the industry, which has caused the number of standalone companies operating on the island to shrink.
The fact that Bermuda is attracting the lion’s share of the new money is significant in terms of the island’s ongoing status as a global re/insurance hub, according to Mark Chudleigh, lead partner in Bermuda for inter- national law firm Kennedys and an expert in financial services and corporate litigation.
“Despite doubts being expressed earlier this year about whether Bermuda would retain its ‘most favoured’ status for new ventures, it is now clear that Bermuda is still regarded by both incumbent Bermuda insurers and the sponsors of new capital as the place to be, particularly for underwriting US-based risks,” Mr Chudleigh said.
“We are seeing a combination of start-up re/insurers, managing agents who underwrite on behalf of capital providers, as well as established reinsurers who are raising additional capital to expand existing business lines or to branch out into new areas.”
While the influx of capital will give the lo- cal economy a shot in the arm, the number of jobs at the billion-dollar start-ups is unlikely to be what it was in 2005. The Convex model may be the blueprint for the modern re/insurance start-up.
Convex has deployed “horizontal outsourcing”, meaning it uses a single outsourcing firm, an Indian-headquartered company called WNS, for everything, as Mr Catlin explained in an interview with The Royal Gazette last year. The upshot is an absence of back-office jobs in Bermuda, although the island gains many higher value roles.
“Employment costs here are as high as they are anywhere,” Mr Catlin said. “Any people you employ here, or in London, have got to be adding value to the balance sheet. Those servicing the balance sheet can do it from elsewhere.”
Nevertheless, Mr Catlin hoped to have a staff of about 50 working at Convex’s reinsurance arm in Bermuda when it is fully up to speed.
Mr Chudleigh said the scale of the Class of 2020’s impact on the domestic economy was questionable. “Of course, there will be new jobs and new arrivals of reinsurance professionals looking for housing and schools,” Mr Chudleigh said. “But I do not expect to see anything on the scale of 2005 or prior start-up waves.
“The prolonged soft market has forced insurers to focus on expense reductions, which included the increased use of technology and ‘offshoring’ to low-cost jurisdictions like India, developments which tend to reduce opportunities for positions that are typically filled by Bermudians.
“This trend has accelerated as a result of the work-from-home revolution: why have an accounts processor working from home in Bermuda when you can hire one in Halifax or India for much less?”
A significant proportion of the island’s air arrivals traditionally come to the island on business, many of them here to negotiate insurance deals. Their stays tend to generate a lot of hospitality dollars, but the success of remote working this year could deplete that business, Mr Chudleigh fears.
“There has been a virtual cessation of business visitors, including insurance buyers and their brokers who may visit for a full week of meetings with golfing and dining thrown in,” Mr Chudleigh said.
“Will these high spending visitors come back in numbers when things return to ‘nor- mal’ or will remote transactions become the norm? If so, does a reinsurer need a big, prestige office with reception and secretarial staff, a large entertainment budget and an on-call taxi driver to ferry business visitors around?” The more high earners are based in Bermuda, whether they be Bermudian or not, the more benefit there is to the economy, since they are likely to be substantial spenders.
Malika Taylor, managing director, Bermuda, of recruitment firm Expertise, stressed that the island had to be as welcoming to new people as it is to new money in order to maximise economic benefits.
Ms Taylor said: “Bermuda continues to welcome financial capital. Our laws, the BMA and our reputation are all optimal. But on welcoming human capital, we lag other jurisdictions.
“To ensure we maximise every economic opportunity we must continue to look to immigration reform and position Bermuda as a leading place to live and work by 2021.”
Ms Taylor reiterated the view she first expressed In a video roundtable discussion on the economy, hosted by The Royal Gazette in August, when she said: “For Bermuda to be successful in the future and maintain a healthy, economically viable community, it needs to get back to being an excellent host.
“The critical point for Bermuda to recog- nise is that everybody who is working from home in Bermuda does not need to be here. We can successfully host tourists who come to Bermuda — a safe environment in this Covid world. We have to pay just as much attention and be just as great hosts to guest workers and individuals, who right now are choosing to work from Bermuda.”
Not all insurance workers will need to brought in, given that Bermuda has built a strong talent base of its own over the past three decades. More than two-thirds of the entire payroll of members of the Association of Insurers and Reinsurers are either Bermudians, spouses of Bermudians, or permanent residency certificate holders.
Mr Chudleigh said: “We have seen a whole generation of Bermudians working their way up in the insurance industry and now occupy- ing mid-level and senior positions.
“The nature of the business is such that there will always be a need for a large number of skilled guest workers, but there are many more Bermudians occupying skilled posi- tions now than there were when the ‘Class of 2005’ arrived. Arguably, the opportunities for ambitious, educated, young Bermudians have never been better.”