Pitts Bay Road in Bermuda is a who’s who of global insurance. Winding along the picturesque waterfront of Hamilton, the island’s capital, the road and its surrounding streets house the local offices of Allianz, Chubb, Axa and Aon.
Over the past 30 years, the Atlantic Ocean island has turned itself into one of the world’s biggest insurance hubs through a combination of low taxes, flexible regulation and easy access to the US.
Its speciality is reinsurance — the cover that insurance companies buy to protect themselves from huge claims caused by extreme events, such as big US tropical storms. The Association of Bermuda Insurers and Reinsurers says that its members generate about $100bn in premiums a year and employ around 1,500 people on the island.
Marc Grandisson, chief executive of Bermuda-based Arch Capital, says: “Clients come here . . . because [there is] a marketplace. Clients can come here and talk to 60 per cent of their providers . . . within a square mile.”
But Bermuda’s status is under threat. Its tax advantages — long one of the big attractions of doing business there — have been eroded by US laws designed to stem the flow of capital offshore. A lot of independent insurers have been swallowed up by global companies. And cities around the world such as London and Singapore are fighting hard to grab a chunk of the island’s business.
The increased scrutiny of tax havens and calls to improve transparency in such jurisdictions will increase the pressures on the island nation of 65,000 people, which has suffered from a decade of economic decline.
“Bermuda is still important, but it is no longer the shining outlier that it used to be,” says Christian Reber, a partner at BCG. “The novelty has worn off.”
Bermuda’s insurance industry sparked into life in the 1970s and 1980s when a handful of companies were set up to fill a hole in the market for some types of US commercial insurance.
The early days were pretty hairy. “Bermuda was a dirty word in the 1980s,” says Stephen Catlin, an insurance industry veteran. “There was terrible regulation — you could turn up with a brass plate and do what you wanted.”
But the industry, and the regulators, evolved quickly. The boom times came in the 2000s. Prices for reinsurance spiked in the early 2000s after the 9/11 terror attacks led to huge claims, and again in 2005 when Hurricanes Katrina, Rita and Wilma caused extensive property damage in the US.
Insurance entrepreneurs were quick to jump on the opportunities presented by rising prices to set up new companies. Bermuda welcomed them with open arms, offering a convenient location and a regulator that allowed businesses to be set up quickly.
“Post 9/11, you could get yourself up and running in Bermuda in four weeks. In London it would take a year because of regulation,” says Mr Catlin.
Low taxes were also a major attraction. Bermuda has no corporate income tax, which is a big advantage to a reinsurance industry where years with no significant natural catastrophes can be very profitable.
The companies set up were known as the class of 2001 and the class of 2005. The former included Arch Capital, Axis and Allied World. The latter included Ariel Re, Flagstone Re and Validus Re. Those two waves helped to build a critical mass of insurers in Bermuda.
Mr Grandisson says: “Tax created the impetus . . . but Bermuda also has English law, is well developed and created a regulatory environment that is very strong yet more flexible and a lot easier to work with than most of the other jurisdictions around the world.”
The regulator — the Bermuda Monetary Authority — is no pushover though. Its reputation among both insurance companies and their customers was boosted in 2016 when the EU said that Bermuda’s rules were equivalent to its own Solvency II regime. And in November this year, the US National Association of Insurance Commissioners ruled that Bermuda was a “reciprocal jurisdiction” — similar to equivalence.
The classes of 2001 and 2005 and a host of other independent Bermudan insurers have slowly disappeared. Ace and XL, two of the earliest insurers on the island, have been taken over by Chubb and Axa respectively in recent years.
There are just a handful of sizeable, independent Bermuda-based companies left, including Arch, RenaissanceRe and Argo. Life is not necessarily smooth for them — Argo is in the midst of a bitter fight with an activist investor and is facing an SEC investigation into pay.
Industry executives say that reinsurance is slowly becoming a scale game, in which only the largest companies have the capacity and data processing power to create the best prices for big clients. Mid-scale companies such as those that multiplied in Bermuda, they say, need to specialise if they are to survive.
The multinationals say they are still committed to Bermuda, arguing that they would not have made acquisitions there if they did not like the market.
AIG, for example, bought Validus for $5.6bn in 2018. “Bermuda is a safe bet when you’re forming a company . . . you’ve got a venue that people will put money into,” says Bermudan-born chief executive Brian Duperreault. “You’ve got a regulatory climate that is tough but fair. Bermuda will continue to survive if it continues to be an innovative place for the market.”
Greg Hendrick, chief executive of Axa XL — a part of the French multinational, says: “It will remain a vital market for low frequency, high severity insurance and reinsurance . . . it is a core part of our North American business.”
And yet many companies are diversifying away from the island.
AIG itself has just decided to open up a big new reinsurance business in Lloyd’s of London. It has also agreed to sell most of its stake in Fortitude Re, a Bermuda-based reinsurer, for $1.8bn.
Japan’s Sompo, which bought Bermuda-based Endurance for $6.3bn in 2016, has just reshuffled the management of its international business. The new boss, Mikio Okumura, will be based in New York, unlike his predecessor whose office was in Hamilton.
And Axa XL earlier this year reshuffled its management, merging its London and Bermuda units, although Mr Hendrick says it has no plans to change headcount on the island.
Even the remaining Bermuda-based independents, which are still very committed to the island, are diversifying. RenaissanceRe last year agreed to buy Tokio Millennium Re for $1.5bn. Part of the rationale was access to new markets: “We liked that it was Zurich-based, advancing our strategy in that region with an established European underwriting platform,” says Kevin O’Donnell, chief executive of RenaissanceRe.
The company also has an office in Singapore, to help rising demand for reinsurance from Asia.
These changes are part of a wider shift in which people and businesses in the reinsurance sector have slowly been leaking away from Bermuda, threatening the island’s economy.
Nigel Frudd, head of Sompo’s international business, says: “The number of companies here has shrunk primarily due to industry consolidation and we have seen a significant departure of talent, such as senior managers and underwriters.”
According to figures from Fitch Ratings, the amount of shareholder capital in the Bermuda insurance market slipped from $82bn in 2017 to $77bn in 2018, and the amount of premiums written there shrunk by 8 per cent.
The number of people employed by ABIR members peaked in 2007 at about 1,800, and is now down to about 1,500, according to ABIR and Bernews, a local news website.
Insurance experts say that a lot of the industry’s technological development is now happening elsewhere.
“If you look at where the centre of gravity is especially for tech- and data-driven innovation, it is not in Bermuda,” says BCG’s Mr Reber. “Bermuda doesn’t have the talent pools, the tech firms, the potential . . . partners. That will matter for Bermuda in the long term. People will work elsewhere, the talent pool will be smaller and decisions will start to be taken elsewhere.”
The disappearance of the independent insurers is one of the reasons for the shift. But it is not the only one.
The cost of living has also been a factor. Living costs in Bermuda are the second highest in the world, according to Numbeo, just behind the Cayman Islands, a tax haven 2,200 miles south-west of Bermuda. Reinsurers, which have had a series of expensive years because of rising claims from natural catastrophes, are trying to save money.
“It is cheaper for us to employ people in London than in Bermuda,” says Mr Catlin, who has just started a new company called Convex. Although Convex will be headquartered in Bermuda, most of its staff will be based in London.
And the global attitude to low tax jurisdictions is also shifting, putting places like Bermuda under pressure.
US president Donald Trump created tax rules in 2017 to discourage companies from moving profits offshore. The base erosion and anti-abuse tax (BEAT) rules make it less attractive for US-based insurers to buy reinsurance from Bermuda-based subsidiaries by charging a levy on the premiums paid.
“Companies are not ceding as much business from the US to Bermuda,” says Brian Schneider, a senior director at Fitch Ratings. “They are keeping more of the capital in the US.”
There could be more of the same to come. The OECD is also looking at rules that would make it less attractive for insurers to reinsure some of their risks in Bermuda.
Earlier this year, it appeared on the EU’s tax haven blacklist. Although it managed to get itself removed from the list just three months later after making technical changes to its rules, the episode has dented Bermuda’s reputation.
Mervyn Skeet, head of taxation at the Association of British Insurers, says: “Every time Bermuda has been asked to do something by the EU, it has worked hard with the EU to find a solution.”
Despite these setbacks, Bermuda has had some notable recent victories. The island has managed to attract the biggest reinsurance start-up in recent years, when Convex decided to base itself there. The company is Mr Catlin’s comeback vehicle after his first business was sold to XL for $4.1bn in 2015
Bermuda, he says, is more “user friendly” than other jurisdictions. That could also be an attraction for other companies that want to take advantage of a recent spike in reinsurance prices, although executives think a “class of 2020” is unlikely.
The island has also taken a leading role in other parts of the insurance market. One is reinsurance for life insurance companies. Another is its role in the huge growth of so-called insurance-linked securities, which allow investors to take on insurance risk directly. According to Aon, the insurance broker, $93bn is deployed in these securities around the world.
Bermuda has become a centre for companies that create and manage these vehicles and is now recognised as the global centre for ILS, having taken that title from the Cayman Islands. That success has drawn envious glances, with a host of jurisdictions now aiming to take a slice of the ILS pie. Paris, Guernsey and Singapore are all trying to win ILS business. And a proposed revamp of Lloyd’s of London, the 300-year-old insurance market, includes measures to attract ILS vehicles.
These add to the pressures the Bermudan insurance market is already facing from industry consolidation and tax changes. “Lloyd’s is irreplaceable,” says one New York-based insurance executive. “Bermuda is not.”