Basking in the Sun Once More
Bermuda is one of the world’s biggest and most successful offshore reinsurance markets, largely as a result of its tax advantages, strong regulatory system and its proximity to the U.S. and Europe.
But in recent years, many of the island’s reinsurers redomiciled to Europe, amid concerns over Bermuda’s international reputation, regulatory uncertainty and political instability.
The outflux started in 2010, when Flagstone Re redomiciled to Luxembourg and Allied World moved its holding company to Switzerland. The latest, Canopius, followed suit at the end of last year.
Companies are now returning to the island, though, after the announcement in March that the European Union granted it Solvency II equivalence.
Bermuda, along with Switzerland, is the only country that garnered Solvency II equivalence and was designated a “qualified jurisdiction” by the National Association of Insurance Commissioners (NAIC), allowing free cross-border trade with the U.S.
Further evidence of the island’s resurgence is borne out by the fact that 64 new reinsurance companies incorporated in Bermuda last year, according to the Bermuda Monetary Authority (BMA).
Meanwhile, seven of the island’s biggest reinsurers merged or were acquired over the last four years, with more deals expected, according to the Association of Bermuda Insurers and Reinsurers (ABIR).
Bermuda is also firmly established as one of the leading offshore domiciles for captive insurance, as well as an alternative capital market.
“Bermuda was always a leading reinsurance domicile,” said Brad Kading, president and executive director of ABIR. “These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.”
Movers and Shakers
XL Catlin’s proposed move from Ireland back to Bermuda made the biggest headlines this year and will be accomplished in the third quarter, subject to shareholder approval. Bermuda was a stronghold for both companies before their merger. XL moved its main operations there 30 years ago, and Catlin incorporated its holding company in Bermuda in 1999.
XL Catlin’s CEO Mike McGavick said the fit with Bermuda is a natural one, given that a significant part of the company’s business and its largest operating subsidiary are already there. He cited Solvency II equivalence as the main reason behind the move, adding that it would benefit clients, partners and shareholders alike.
“These two bilateral agreements [Solvency II and NAIC qualified jurisdiction status] further cemented its position as a reputable domicile for reinsurance.” — Brad Kading, president and executive director, Association of Bermuda Insurers and Reinsurers
“With the recent determination of full Solvency II equivalence in Bermuda, it has been concluded that the BMA is best situated to serve as XL’s group-wide supervisor and to approve XL’s internal capital model,” McGavick said.
Qatar Re also announced at the end of last year that it would relocate its main operations from Dubai to Bermuda after its merger with parent Qatar Insurance Co.’s Bermuda-domiciled reinsurer Antares Reinsurance.
CEO Gunther Saacke cited Bermuda’s “decades of proven reliability” and said that the move would enable the company to consolidate its capital and move closer to its brokers and clients in the U.S.
Ross Webber, CEO of the Bermuda Business Development Agency (BDA), said the decision by all of these companies to redomicile to Bermuda sent a “very positive message.”
“No doubt Solvency II equivalence played a big part in all this, but Bermuda’s improving economic outlook and growth in business confidence is also a factor,” he said.
“Our company register is growing across all sectors at present, while consolidation only strengthened the physical presence of companies such as XL Catlin here on the island.
“As a result of all this, we are already seeing companies looking to set up new operations, to merge or to expand their operations here in Bermuda.”
Webber said that the main reason behind companies leaving Bermuda in the first place was a move from U.S. and European regulators to bring companies back onshore.
Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” he said.
“Some left simply because the CEO and leadership wanted to physically move themselves back onshore, along with the corporate structure that goes along with it.”
David Brown, a retired insurance industry veteran and former CEO of Flagstone Re, which redomiciled from Bermuda six years ago, said there was no single trigger for the exodus.
“I think that people were almost hedging their bets — not knowing if Bermuda was going to get Solvency II equivalence — by moving to jurisdictions in the EU that were considered more likely to succeed,” he said.
“Another factor at the time was the political risk associated with an unsustainable public debt growth, as well as a negative political climate against international business and expat employees generally.”
But he added that since the government started to tackle the debt problem and make the island more welcoming to international business, companies now are taking another look at the island.
Solvency II Equivalence
Gaining Solvency II equivalence means that Bermuda is now better positioned to meet the regulatory standards being redrawn by the International Association of Insurance Supervisors, said Kading, as well as to provide more capacity for markets like Asia and Oceania.
Being offshore “was perceived as somehow being unpatriotic and somewhere you shouldn’t be,” — Ross Webber, CEO, Bermuda Business Development Agency
“All this means is that the Bermuda Monetary Authority is now recognized as a global group supervisor for targeted insurance groups and reinsurance can be conducted on a cross-border basis without market barriers,” he said.
“For Bermuda insurers, this means an efficient rather than redundant layer of group supervision and for reinsurers, it means cross-border trade without individual jurisdictional restrictions.”
Susan Molineux, senior financial analyst at A.M. Best, who was based on the island for more than a decade, said that achieving Solvency II equivalence was a “big win” for Bermuda.
“Bermuda expended a lot of effort to really explain to Europe what they do and how they do it, and it paid off in the long run,” she said.
Despite the positives, Bermuda still has a way to go to convince everyone that it is on the rise.
Saddled with a $2 billion debt after seven years of deep recession, the government is under pressure to rein in costs and to find new revenue sources, mainly through tax collection.
A.M. Best said last year that it maintained a negative outlook for the island’s reinsurance industry. In response to this, the BDA is setting up industry focus groups. It is promoting Bermuda as a domicile in conjunction with ABIR members to attract new business from emerging markets such as Latin America and China.
After years of departures and uncertainty, Bermuda is seemingly restoring its position as a leading reinsurance market. &
Technology to the Rescue
The growing scale and severity of natural and man-made catastrophes makes it increasingly difficult for insurance companies and claims handlers to access affected disaster sites. It can take weeks or even months for loss adjusters to see the true extent of damage caused by events on the scale of Hurricanes Andrew and Katrina.
But that’s changing with the development of technology such as drones, satellites and 3D imaging, which allow insurers to gather data and images quickly and efficiently, ultimately better protecting their clients against future risks.
There are still hurdles for insurers to overcome, starting with Federal Aviation Administration requirements for operating drones in U.S. airspace, as well as privacy issues, and the potential for property damage or civilian death in the event of a crash.
But uptake is still rising because of affordable hardware as well as increasing onboard instrumentation and offline data processing improvement.
“A lot of this new technology is great at assessing and understanding potential risks in a pre-loss scenario, as well as when an event happens,” said Sheri Wilson, national property claims director at Lockton.
“In some cases, there will always be the need for boots on the ground before the check is written, but this technology can certainly be used to get a more complete picture of what’s going on.”
Rise of the Drones
Jimmy Johnson, assistant vice president of commercial property claims at Zurich North America, said the main advantage of drones is the ability to provide access to difficult-to-reach disaster sites, allowing insurers and their customers to understand losses in greater detail.
“Being able to obtain information almost in real time, whether it’s taking pictures or communicating those losses, is a huge advantage not only to the insurer, but to their clients as well,” he said.
“The app allows them to record and send pictures and videos to the insurer to show them the extent of the damage and it is then uploaded to their server for them to assess.” — Andreas Shell, global claims executive of new technologies, Allianz Global Corporate & Specialty
Helen Thompson, director of commercial marketing at Esri, a geographic information system provider, said that another benefit is the speed of response, as well as use in hazardous situations, such as the port of Tianjin explosion last year.
“Drones are able to quickly assess large areas and identify, with human observation, the scope and scale of the disaster,” she said.
The main sticking point remains that only a handful of insurers, including State Farm, USAA and AIG, have obtained FAA approval to test drones for commercial use.
Gary Sullivan, vice president of property and subrogation claims at Erie Insurance, which was granted a license by the FAA last year to use drones for claims and in catastrophe situations, said that the biggest advantage is safety, as well as the time and cost efficiencies gained.
“It means the difference between keeping our employees on the ground versus the time and risk associated with having them climb a ladder to get onto a roof, and, ultimately, the imagery we obtain from a drone is just as good, if not better than we would otherwise be able to take,” he said.
Among the disadvantages, he said, were the need for a pilot’s license and having to get clearance to fly in no-go zones, for example, near airports and military bases.
Andreas Shell, global claims executive of new technologies at Allianz Global Corporate & Specialty, said one problem is that drones can only be used if the operator is in close proximity and maintains visual contact.
On top of that, he said, there are a host of legal and regulatory requirements.
“Right now, government agencies are tightening up these requirements more than ever due to the number of private operators currently out there,” he said.
Varying Image Formats
Video technology such as Skype and FaceTime has allowed insurers to develop smartphone apps that can be used to record property damage.
“[They can] send pictures and videos to the insurer to show them the extent of the damage.”
Such technology could be used in low value cases where sending out a loss adjuster may be more costly than paying the claim.
David Passman, national director of property claims for North America at Willis Towers Watson, said that when it comes to assessing wide areas of damage, satellites are often the best technology because they can capture a lot of data quickly.
The downside, he said, is that the picture quality may not be as good as a drone or 3D imaging.
“It enables you to take pictures before and after the event, and compare them side by side to determine not only what has happened to the property concerned, but also to the terrain around it,” he said.
“This can also help clients to put into action their business interruption or continuity plan, for example, by knowing what transport routes are open and putting in place an appropriate logistics strategy.”
Future of Technology
Thomas Haun, vice president of strategy for PrecisionHawk, an aerial data provider, said that as with all of these technologies, being able to quickly quantify the extent of damage and understand how safe something is, is critical in the response effort.
“Drones give you that ability to respond quickly and effectively to these types of disaster, but also to prevent or mitigate against future events,” he said.
However, Bud Trice, vice president of catastrophe services at Crawford, warned that despite the many advantages, the biggest challenge with this type of technology is fragmentation, with the possibility of each insurer deciding to go its own way with a different solution, many of which may be incompatible with one another.
Randall Ishikawa, vice president of property risk solutions at EagleView, a 3D imaging company, said that in the long run, technology could help expedite claims handling and reduce operational and claims costs for insurers.
“At the end of the day it can save money for the insurance carriers, and from an underwriting perspective it can determine the viability of the risk concerned as to what action needs to be taken at renewal,” he said.
Erie’s Sullivan added that the potential benefits are huge.
“From an industry standpoint there’s enormous potential because in the future you might be able to fly the drones much more often and to assess the risks on your books in order to identify potential hazards before they happen,” he said. &
The Cyber Captive Option
Cyber risk has become the top priority for many companies following the recent spate of high profile data breaches and hacking attacks that hit the headlines, including Target, JP Morgan and AT&T, to name but a few.
However, they have often struggled to find the right coverage in the commercial insurance market at an affordable price.
As a result, some companies are turning to the captive market, with a recent Aon study revealing that 7 percent of captive owners surveyed have indicated an interest in underwriting cyber risk through a captive.
Given the nature of cyber risk, a captive program can often be an attractive solution, allowing the owner to diversify its risk portfolio, build up its reserves and cover risks such as future lost revenue or first-party loss of inventory that are not always readily available in the traditional market.
It can also cover highly correlated risks including cyber and reputation that aren’t always included together in the commercial market.
Having a captive also allows the owner to assume a high deductible and/or higher coverage limit and to fund it through the captive in order to gain access to reinsurance markets offering cyber coverage.
Furthermore, it can allow companies to better track data and have greater control of claims, as well as provide access to various tax and financial statement benefits.
The main captive domicile to benefit from this influx of new business has been the State of Vermont, which currently has 17 licensed captives that write cyber risk as a stand-alone policy, not to mention those that have an endorsement built into their general liability programs.
“Company executives and risk managers recognize the threat of a cyber attack and that it could have a significant impact on their organization,” said Sandy Bigglestone, director of captive insurance at the State of Vermont.
“The risk managers of our captive owners understand and can measure their risk better than anyone, therefore considering a captive to address the problem of cyber risk is only a natural reaction to this phenomenon.”
Cyber Risk — the Next Step for Captive Owners
Bigglestone said that writing cyber risk into their program was often the logical next step for many captive owners.
She said that the main advantage Vermont has for prospective and existing captive owners is a strong and well-resourced infrastructure, as well as, crucially, laws that allow for cyber coverage to be written into captives.
“I believe that the growth potential of cyber coverage being written into captives is tremendous.” — Dan Towle, director of financial services, State of Vermont
“Cyber coverage is another vital element of risk financing and control that a captive owner and their manager needs to explore and, if they decide to, then implement,” she said.
“Here in Vermont, we have a host of highly skilled professionals who focus on managing, consulting and advocating for captive insurance companies, including attorneys, auditors, accountants, actuaries and consultants.
“They also have at their disposal a huge network of resources to assist captive owners with every type of solution, including cyber coverage.”
Dan Towle, director of financial services for Vermont, said he has seen the benefit of this move toward captives for cyber coverage. The problem is the traditional insurance market has failed to keep pace with the needs of the industry.
He said that because of the limited capacity available and existing exclusions on cyber coverage, captives are often a better solution for companies looking to insure their specific risks.
“I believe that the growth potential of cyber coverage being written into captives is tremendous,” he said.
“Above all, they can fill many of the needs for cyber coverage that are not readily available in the commercial marketplace.”
A Captive Risk Manager’s Perspective
Gary Langsdale, risk manager at Pennsylvania State University, which owns a captive domiciled in Vermont that writes cyber coverage, said that as a higher
education institute, it was often difficult to find the right policy in the commercial marketplace because of the risks associated with cyber, making a captive a more viable option.
He said that having a captive for this purpose gave the university the flexibility to self-fund its own program using a two-tiered deductible — the first for the academic units that don’t follow good practice and the second for those that suffer a breach regardless.
“Over the years, it has become increasingly difficult for us to find a home for cyber insurance, largely because as a university we have a very open IT infrastructure as often we need to share information with publications and other external collaborators,” he said.
“That has meant that in the past commercial insurers have held that as a black mark against us, but having our own program has allowed us to get information about those breaches more readily and be more in control of our own risks.”
Vermont — the Domicile of Choice
Jason Flaxbeard, executive managing director at Beecher Carlson, which manages 24 captives in Vermont, said that the state’s key selling point is its ability to be on the cutting edge of technology, as well as taking a risk-based approach to new coverages like cyber.
As a result, he said, Vermont has been proactive in opening its doors to new business and has already started to reap the rewards.
“Vermont is an excellent place to base efforts to provide protection against rapidly developing exposures such as cyber risk.” — Eric Dethlefs, CEO, Cassatt
“I’m a big fan of proper and appropriate regulation and in having someone who will take your call and help you to work out a solution to your problem; in that regard,
Vermont has always provided that service to a very high level,” he said.
“It’s a mature domicile, and there are enough people there who understand the captive insurance industry and the risks associated, and above all they understand who their clients are.”
Jim Swanke, director of risk consulting at Willis Towers Watson, said that
Vermont’s ability to provide “out of the box” innovative solutions made it an obvious choice for companies looking to write cyber in their captive programs.
“They got into the captive business in 1981 and they have really got the whole captive management process down to a science in terms of the regulatory environment and the solutions they can provide,” he said.
Eric Dethlefs, CEO of Cassatt, an insurance product and service provider, said that with more than 1,000 licensed captives on its books, Vermont was the “gold standard” for captive insurance regulation.
“Vermont is an excellent place to base efforts to provide protection against rapidly developing exposures such as cyber risk,” he said.
“As cyber and privacy breach risk continues to emerge as a widespread global threat, I think that the attractiveness of forming a captive for this purpose will become an increasingly popular option.”
The Future of Captives for Cyber Insurance
Julie Boucher, Marsh Captive Solutions Practice leader, Americas, said that the use of captives for cyber coverage would only continue to grow in the future.
“The growth potential is huge because every day I see the ongoing conversations
between captive managers, regulators and service providers, and the complexity of analytics around the use of cyber in captives continuing to evolve,” she said.
“For the moment, it remains to be seen how many captive owners will actually pull the trigger, but the interest is certainly there.”
Bigglestone believes that as companies continue to develop strategies to deal with cyber risk, the uptake of captives for that purpose will only increase going forward.
“I expect that Vermont’s role will be significant in that space, as we become more experienced with cyber risk, and well-positioned to accommodate new captives seeking to write cyber coverage, and existing captives expanding their businesses,” she said. &