Bermuda is an island paradise, long known for as beauty and pink beaches. However it has been steadily gaining a reputation in the international business community for its growing innovative financial and insurance industry. Locally, international business is recognized as one of the two "Twin Towers" of the economy, along with tourism. As the global economy grows and becomes more and more interdependent, recent trends in international insurance place the Bermuda insurance community in a premier position to respond to the changing buying needs of international companies.
The international insurance community in Bermuda dates back five decades and has undergone several historical cycles. Bermuda has long been the captive insurance capital of the world. A captive insurance company is a closely held insurance company whose insurance business is primarily supplied by and controlled by its owners and in which the original insureds are the principal beneficiaries. According to government statistics, there are close to 1500 captives operating in Bermuda today
In the middle of the 1980's when the Litigation Liability crisis was at its zenith in the United States, Excess Liability carriers ACE (1985) and Excel (1986) were formed to provide much needed large limits of excess liability protection for major corporations that could not buy affordable excess liability coverage. These two companies were initially owned by their respective customers. Over the course of time they went public and today both are listed on the New York Stock Exchange. Branching out from Excess Liability, these two companies began offering additional lines of coverage such as property, directors & officers liability and employment practices liability.
Soon events of another sort in the United States would influence the Bermuda insurance marketplace again. When Hurricane Andrew hit Florida, closely followed by the Northridge California earthquake of 1994 property cat insurance such as earthquake and windstorm became unavailable for many companies. Bermuda responded with the incorporation of more than half a dozen "Property Cat" reinsurance carriers. These carriers were able to build huge capital bases in a relatively short time due to the absence of additional catastrophes over the next several years.
Over the last several years there has been a new cycle of diversification and acquisitions, primarily driven by XL and ACE. Four of the original property cat reinsurers have been snatched up as well as major purchases of Lloyd's of London agencies. The Bermuda corporate presence at Lloyd's is tremendous. For decades, insurance has been bought and sold on exposure driven perils. The emphasis has been on covering claims for exposures such as fire or products liability. Certain items in the insurance buying transaction, such as deductibles, have become totally out of synch with size and financial capability of international companies. Even certain subjects of insurance are not addressing the real financial needs of companies. As an example, a retail chain may have protection against financial loss caused by an armed robbery but not against its multi-million dollar a year shrinkage problem. Companies are becoming increasingly concerned with events of a catastrophic nature than can have impact both short term on Profit & Loss Statement and Longer term on the actual viability and survival of the firm.
We are seeing the emergence of a creative true risk management problem solving phase. The Bermuda insurance community, Led by ACE, XL, Chubb Atlantic and others is well positioned to respond. Recent trends have included multi-year, multi-line policies, Finite risk, blended programs and securitization of risk.
What are the concerns of customers? They want to have both financial and intellectual assistance in responding to crisis's. They are more concerned with events rather than insurance perils. They want protection of both short term earning potential and long term balance sheet protection. Finally, they are also interested in stability of expenses over multiple years as respects budgeting.
One of the more common recent trends is the multi-year, multi-line approach, sometimes referred to as combined lines approach. By combining infrequent but high potential severity Lines of business such as liability, property and Directors & Officers, a firm is hoping to achieve one or some of the following objectives: higher total limits available for a single event, more ef6cient cost expenditure, and broader scope of coverage. It can also improve the quality and limit the number of carriers on a program.
Finite risk products are those products where the client funds for an event where insurance products are either unavailable or not cost efficient. Blended programs combine elements of both multi-year, multi-line and finite. This approach adds additional flexibility to the structuring of the program enabling the customer to focus in on their most pressing needs.
It is evident that program structures and terms will be changing to reflect shifting marketplace needs. These solutions, along with ones yet to be developed, are dynamic mechanisms, and will evolve to answer risk managers' changing needs. It is difficult to predict where all this will lead, however, the trend towards protecting the balance sheet of the customer is on.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances
This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com