There is no question that Bermuda has an exceptional reputation as a key global insurance and reinsurance jurisdiction, a reputation it has earned over many decades.
There are a number of reasons that have led to this distinction, notably, an effective risk-based regulatory framework and a robust infrastructure that includes a deep pool of human and financial capital. The result is a powerful market, playing an essential role in the global financial and risk management industry.
The effect of this is that Bermuda is seen by capital providers as a natural jurisdiction in which to put that capital to work, and as an ideal base from which to expand that capacity into other markets. In recent months, a flurry of activity has highlighted that Dubai, and by extension the MENA region, is a key market for that expansion.
Bermuda offers several advantages to reinsurance groups. We examine those advantages and how they have led to an increase in ties between Bermuda and the MENA region.
An established insurance market
Bermuda has had an active and developing insurance market for over half a century, and the Bermuda Monetary Authority (BMA) has led the way in establishing international prudential standards.
The BMA takes a risk-based approach to the regulation of insurers. Insurers are classified and regulated based on their overall risk profile, and the regulation generally is principles-based rather than prescriptive. Of course, these are not concepts that are unique to Bermuda. Other jurisdictions also apply a similar approach, but Bermuda has been doing it for a very long time and has developed it in a way that works.
Bermuda insurers are licensed and classified – and therefore regulated – according to the risk profile they present. On one end of the spectrum there are "limited purpose insurers" (captives) which are insurers that only (or at least primarily) insure the risks of their parent and affiliates. At the other end are the "commercial insurers", writing all third-party business, and participating fully in the commercial markets. In each case, the level and style of regulation has been developed to be commensurate with the risk involved.
This regulatory distinction between limited pur pose a nd commercia l insurers is illustrative not only of a continued focus on maintaining a risk-based approach, but also of the pragmatic market support position the BMA adopts when developing regulation.
In short, this is because limited pu r pose insu rers a re not caught within the more complex Solvency II-style regulation that is applicable to commercial insurers, and this bifurcation of the regulatory framework is hugely important to the jurisdiction.
Solvency II equivalence
Solvency II equivalence is essential to the island's commercial market. It allows Bermuda reinsurers continued efficient access to write into the European market. The BMA recognised that need, and worked to consult widely and comprehensively with all industry parties, in order to respond to what the industry needed, and what international prudential standards demanded. The result is that Bermuda is now on the cusp – formally – of full equivalence under Solvency II.
At the same time, one of the fundamental (and ultimately successful) objectives of the BMA in all of this was to ensure that the captive market was not subject to Solvency II-style regulation. This is sensible when looked at from a risk-based perspective and from a market perspective, as it preserved the enormously valuable captive market on the island.
In addition, when you add to this the fact that Bermuda regulation is typically principles-based, rather than being prescriptive, you end up not only with a market that has a rational regulatory approach, but one that fosters innovation. If the regulation is based on clear principles, it is able effectively to adapt to a rapidly developing market in ways that a prescriptive approach could not. This adaptability, and the innovation that it supports are hallmarks of the Bermuda market.
Largest captive domicile
Bermuda invented the concept of captive insurance over 50 years ago, and even in the face of comparatively vast competition, it remains the single largest captive domicile in the world. The commercial market followed suit, and Bermuda is now one of the three largest reinsurance centres in the world, next to New York and London. With a sophisticated commercial market, the next natural development was then into the booming Insurance-Linked Securities (ILS) market. ILS is innovative and fast-moving, so what better market could there be for it than Bermuda?
Of course, there is more to success than good regulation. A sophisticated and reliable infrastructure, intellectual capital, good governance, a reliable and well-developed legal system, and transparency are all essential, and in that regard, Bermuda truly is a leader.
From a market perspective, 2015 saw a continuation of the healthy number of new insurers registered on the island. This included 65 new licences issued by the BMA: 22 captive insurers, 22 commercial insurers and 21 Special Purpose Insurers (SPIs).
The commercial registrations in 2015 included four new Class 4 reinsurers (the largest and most significant of the commercial classes), and perhaps most notable of these is the redomicile of Qatar Re into Bermuda.
Qatar Re is by any measure a very significant player in the MENA region, with substantial market presence – and ambitions – globally. As part of their global business development strategy, Qatar Re recognised the need to be domiciled in a jurisdiction that would best place them for growth. It describes its move to Bermuda as a "natural choice", allowing it to take advantage of the island's "international reputation, decades of proven reliability, uncontested best practices and proximity to the US market, along with its anticipated Solvency II equivalence". The company also saw Bermuda as being best placed to "support its ability to access and compete throughout the world's markets in a credible manner".
In addition, ABR Re was also licenced as a Class 4 insurer early in the year with US$800 million of new capital, a joint effort of ACE and BlackRock, and was quickly followed by Fidelis Insurance. Fidelis was significant, in particular, for having raised a staggering $1.5 billion of new capital, making it the single largest new Bermuda start-up in over a decade – all the more remarkable for having been achieved in a soft market.
Finally, ILS activity remained strong in 2015, with 21 new SPIs formed. Most of these were formed as CAT bond issuers, and Bermuda is now home to over 68% of all outstanding ILS capacity, representing nearly $18 billion of alternative insurance capital.
The significance for Dubai and the MENA region
So what does this mean for Dubai and the MENA region? The short answer to that is that the Dubai market is a very significant, indeed necessary, portal to access the regional MENA business. In a truly global reinsurance market, those insurers and reinsurers seeking to deploy their capacity in the region view Dubai as the clear choice for doing so effectively.
Over the past year, and particularly in the latter half of 2015, a number of major Bermuda reinsurers have opened branches and offices in the DIFC, further speeding the pace of development. Qatar Re, in parallel with their move to Bermuda, also opened their Dubai office in 2015, as did AXIS and PartnerRe. These moves followed in the footsteps of other recent entrants including Validus, Argo Group and Catlin.
In a recent interview, Mr Brad Kading, the president of the Association of Bermuda Insurers and Reinsurers (the industry association of Bermuda's large Class 4 insurers), was asked his view of the impact of these links to Bermuda – did his members view Dubai as a competitor to Bermuda? His response was clear: the Dubai and Bermuda markets are not in competition with each other, they are complementary.
Bermuda has the capacity, and Dubai offers the link to not only the rapidly expanding local Middle Eastern market, but also Africa and parts of Asia, where that capacity can be put to work. It is therefore only natural that Bermuda insurers and reinsurers will look to establish a foothold there, in one of the fastest-growing global markets, and that local buyers of reinsurance should welcome the opportunities that greater ties to the Bermuda market will bring.
This article was first published in Middle East Review, March 2016
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