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How's this for a small world? You work in the insurance industry; so does your wife; and your best friend--all your friends, come to think of it; apart from the couple who work at the bank's insurance division.

When you drive to work, the cars and mopeds in front of you and behind you are driven by people who work in insurance. The morning paper is full of industry news. At lunch, insurance people, talking about--what else?--insurance, sit at almost every table in every restaurant.

In the world of insurance, we speak of "markets," intangible convocations of people, ideas, equipment and capital.

Lloyd's is one such market, but leave the Blade Runner building at One Lime Street in central London, and you could be anywhere.

New York's insurance market exists in randomly spaced buildings, and the same applies: walk out onto the street, and like a first-class air traveler who has just disembarked from a world of prestige, you're just another person in another bustling city.

So what exactly is a market? Thanks to its small size and welcome mat for suitable corporate arrivals, Bermuda may be the prime example in all of history of the concept of the market made physical.

"The sustainability of the Bermuda market is clear," says Donald Kramer, chairman and CEO of Ariel Reinsurance Co. Ltd. "What we've put together in Bermuda is one of the densest infrastructures of any insurance market in the world, including Lloyd's and the United States."

Silicon Valley is a market, but everyone there is in the private sector, just as Lloyd's is private sector only. Bermuda, and more specifically Hamilton, its 177-acre capital city, mixes public and private and has all the elements of a market in one tight place. And it's becoming tighter by the day.

THE CORPORATIONS

How's this for a big world? About three dozen Bermuda reinsurers boast a billion dollars or more in capital. Three hundred smaller companies maintain a physical presence on the island. Another thousand Bermuda insurers, mostly captives, are represented locally by managers and attorneys.

The companies are owned by Americans, South Americans, Brits, Europeans, Asians, and, in one or two cases, Bermudians. Three-quarters of the 100 largest U.S. companies have Bermuda captives, as do a like percentage of Europe's largest corporations.

The British have piled in during the last couple of years. Rare indeed is the U.K. insurer that is not now headquartered, or at least doing a good share of its business, in Hamilton. And all of this on an island of just 22 square miles.

"We have watched the growing market in Bermuda and for some time considered that we need to underwrite there to increase the spread, balance and distribution of both our global reinsurance and retail accounts," says Robert Hiscox, chairman of the company that bears his name, which he relocated to Bermuda in 2006. "Bermuda is a fast-growing reinsurance market, which now sees business not shown in London."

The Bermuda market has distinct advantages, says Scott Carmilani, chairman, president and CEO of Allied World Assurance Co. Holdings Ltd.

He says those include available capacity for catastrophe risks, underwriting talent to service large insurance and reinsurance buyers, proximity and access that makes it easier to buy coverage, and the speed and flexibility to stay ahead of the market.

Allied World was a member of the Class of 2001, the wave of companies that was formed in Bermuda after the events of Sept. 11, 2001. That group cemented Bermuda's reputation and turned a disparate market into a global force. Endurance Specialty Holdings Ltd. is a 2001 Classmate.

Kenneth LeStrange, chairman and chief executive officer of Endurance, says that with the influx of new companies created in 2001, a number of "exceptional management teams" came together to start fresh and avoid past mistakes.

"Although the industry as a whole has posted pretty attractive underwriting and financial results in the aggregate over the past six years, our class really stands out in terms of performance versus industry averages," he says. "These superior results were achieved despite a very challenging environment emanating from enhanced regulatory rigor, greater transparency in financial reporting, the hurricanes of 2004, KRW events in 2005 and a challenging financial environment evidenced lately by subprime issues."

Bermuda also has more captives than any other jurisdiction.

Eduardo Fox, manager of corporate and Latin American affairs at Bermuda-based global law firm Appleby, has been involved in developing the Latin American captive market in Bermuda for 10 years.

Of a recent conversation with representatives of Venezuela Petroleum, Fox says: "Everything in Bermuda was what they were looking for and (they were aware) of the Bermuda insurance market being of such importance."

... which goes to show that if you regulate the corporations sensibly to global standards, Bermuda officials are confident they will come.

THE FINANCIAL CAPITAL

Bermuda is home to more than $130 billion in insurance capital and $400 billion in insurance assets. That's chump change, compared with the wall of money sloshing around in the capital markets, but it's a good chunk of the global insurance capital: It's about $2 million per Bermuda resident. For the U.K. alone to match it on a per capita basis would require $1.2 trillion of insurance capital, just about the worldwide total.

The Bermuda market is focused on property/casualty business. It has two main products--property-catastrophe reinsurance and alternative risk financing--and any number of specialty lines. The offerings have become increasingly diverse in the past decade.

Bermuda captives write just about every coverage known to man. Professional lines, especially directors' and officers', multiline or integrated programs, financial insurance and reinsurance, and specialty programs abound. Political risk is a growing Bermuda discipline. A nascent life insurance and reinsurance business has had its ups and downs, but clings to life.

Accompanying the march of money to this remote island chain in the mid-Atlantic has been a veritable who's who of the world of insurance. Led by Maurice "Hank" Greenberg, former CEO of American International Group Inc., a parade of industry talent has been drawn to Bermuda's not entirely arduous working conditions.

"Bermuda has seen the arrival of a big wave of smart people from the U.S. and U.K.," says Ariel Re's Kramer. "We have a good number of market leaders here, well-known names. The island's intellectual capital is as impressive as its financial clout."

Many of the industry's big names are aboard, from East and West, and have been for a long time, but there's now also a growing cadre of underwriters, actuaries and specialists. Again, the numbers are absurd. The United States would be home to almost a million actuaries if it had as many per capita as Bermuda does and if a million actuaries could be found.

The Bermuda market is largely brokered. The obvious suspects are all present in force, plus all the smaller and more specifically oriented brokers from around the world.

"What makes Bermuda superior is the number of markets and the depth of talent in those markets," says Phillip Pettersen, managing director of Towers Perrin's Bermuda reinsurance operations. "Most of the people who come here are among the best in their respective fields, thus making it a particularly efficient market. From our perspective, it's also a highly technical market, which is well suited to our style of broking."

Most Bermuda captives are managed, and again the big names are in Bermuda in force, along with many better-known and less well-known managers. Most of the captive market is managed by specialist firms that do nothing else.

All the world's major accounting firms are in Bermuda, and have been for more than 40 years. One or two have their global headquarters on the island. Three major law firms, one insurance specialist and a host of smaller firms with insurance departments are active, many employing third-generation attorneys whose families have practiced nothing but Bermuda corporate law since the 1960s. Bermuda cannot generate more than a fraction of the professionals needed for a market this size, so many are imported from Britain and Canada.

Rents are astronomica--$18,000 a month for three bedrooms would not be out of line. Because the larger Bermuda insurance companies might earn $1 billion of premiums with no more than 100 staff, at an average of $10 million per person per year, annual rents of $250,000 are not considered out of the question.

Bermuda has only four major banks, never having gone the route other island nations have pursued of attracting as many banks as possible, regardless of quality.

Through Bermuda's banks flow most of the insurance industry's assets on their way to and from New York City and the other global financial centers in which they are managed.

Two technological developments in particular have helped fuel the Bermuda market: the computer and the jet plane. Bermuda has pioneered the development of catastrophe modeling and led a new professionalism that just might change the face of the practice of reinsurance: regular profitability, not yet achieved for more than a year or two in a row, might one day soon be possible over far longer spells.

Direct commercial flights to Bermuda are possible on a daily basis from the major Eastern seaboard hubs and London.

All you need to know about private aviation in Bermuda is that, a few years ago, the odd private jet was visible during keenly contested renewal seasons, as major clients flew in for a face-to-face. Today, rarely fewer than half a dozen private jets are parked on the apron every day, and renewal season can see three times that many. Talk about your flight of capital.

A RISK-BASED REGULATOR

The word on Bermuda has always been that regulation is "firm but fair," but envious competitors have translated that phrase as "firm but unfair" as the regulatory environment favors the business interests already established on the island. But the days of soft regulation and the rubber stamp are slipping into the past.

The Bermuda Monetary Authority, with a staff approaching 150, now regulates the insurance and other financial services industries to global standards, which it is often involved in setting. Its growth will continue to outpace that of its subject markets for some time to come.

This year, a capital solvency model will be introduced, geared specifically to the Bermuda insurance market.

"Our goal is to be recognized internationally as a leading risk-based financial regulator, and this is driving the next round of initiatives in our regulatory agenda," says Matthew Elderfield, recently appointed head of the BMA after serving in the British Financial Services Authority. "We're focusing on key initiatives, such as insurance solvency, models and group supervision, which have local application with an international perspective."

"These are the regulatory issues that are challenging authorities in other leading jurisdictions, whether London, New York or elsewhere, and we're already working on them here to ensure our framework remains cutting edge," he adds.

Ariel Re's Kramer says the companies are pleased to see the BMA grow in stature and clout as it will help the Bermuda companies' credibility. But Facing Elderfield and the BMA is an array of powerful lobbies who sometimes line up on opposite sides of the table from the regulator. Large international carriers and reinsurers are represented by the Association of Bermuda Insurers and Reinsurers.

Foreign companies band together as the International Companies Division of the Chamber of Commerce, and the brokers have the Bermuda Insurance and Reinsurance Brokers' Association to fight for their interests.

Then there's a Bermuda Captive Owners' Association and an Insurance Development Council, with a plethora of committees, which oversees the entire insurance sector. The Bermuda International Business Association represents everyone.

Bermuda Inc. is a market driven, uniquely, by a team of competitors.

What has always made Bermuda work is its public-private partnership. Government understands that its interests are indivisible from those of the international corporations that call Bermuda home.

But of late, that partnership has been tested by a new government leader, Premier Dr. Ewart Brown, who is remaking Bermuda into a fairer and more all-embracing place.

Observers sense friction between the government and its corporate subjects, but from his vantage point, Carmilani says the relationship hasn't changed much.

"There seems to be a growing attention and focus on improving the (local) education system from both sectors," he says. "That is a very good thing, and hopefully we can all unite to find a solution for the benefit of everyone's future."

The Bermuda market employs 17,000 people worldwide. In Bermuda, it directly employs 1,700 of Bermuda's 65,000 resident population, and indirectly contributes to the livelihoods of 10,000 others.

Visiting insurance and reinsurance clients stay in Bermuda hotels; Bermudian landlords rent their office buildings to insurance companies and their family homes to insurance families; and Bermuda companies contribute to cultural events. International companies provide more scholarships than there are college students.

AXIS Capital Holdings and the Catlin Group Ltd. have recently started sponsoring high school students.

"One of the strengths of Bermuda is the ease of entry. You can get into the business in response to shortages with great efficiency, which is hard to do anywhere else," Ariel Re's Kramer says.

"However, one of the weaknesses of the Bermuda market is the ease of entry for those who follow you, so the market is self-correcting," he adds.

A symbiosis now exists between re/insurance and the Bermudian people: neither would do half as well without the other. In no other place in the world is that even remotely as true.

ROGER CROMBIE is a Bermuda-based columnist for Risk & Insurance®.

March 1, 2008

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