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With an insurance market comprising nearly 1,400 companies, total assets of $442 billion and gross premiums of $142 billion, Bermuda is regarded as a pioneer and leader of the offshore insurance industry and has the third largest insurance market in the world.
At the heart of this insurance market sits the Bermuda Stock Exchange (BSX). Founded in 1971 and with listed insurance companies and insurance-linked securities worth $39 billion, the BSX is becoming the exchange centre for the listing of these products. The Exchange provides sophisticated and institutional investors with a single location to obtain access to and information on this developing market segment.
Regulating both the insurance and capital markets in Bermuda, is the Bermuda Monetary Authority (BMA), under whose auspices the Insurance Amendment Act 2008 (Insurance Amendment Act) came into effect, in October 2009.
Described as an “exciting development for Bermuda” by Andre Perez, CEO of Horseshoe Group, the Insurance Amendment Act provides specific risk based regulations for the establishment of special-purpose insurers (SPIs) as a new class of insurer within Bermuda’s insurance class system. It recognises and facilitates the structure of insurance linked securities (ILS), such as catastrophe bonds (cat bonds). A listing on an internationally recognised stock exchange makes these securities significantly more attractive for potential investors.
This article will explore the impact the Insurance Amendment Act will have on the insurance industry and Bermuda’s capital markets. It will also argue that Bermuda’s ability to remain at the forefront of insurance product innovation, its commercially sensible regulatory regime, its international stock exchange, wider financial and legal services sector and geographical position between the US and European markets, make it the logical jurisdiction where the insurance world and capital markets should converge.
Insurance-Linked Securities: The BSX – Experience and Regulation
The BSX is the world’s leading fully electronic offshore stock market. It has over 650 listed securities and a combined market capitalisation of approximately $200 billion.
Unlike other exchanges, the BSX sits at the centre this market, making this exchange one of the few with the unique opportunity to play a significant role in the convergence of the insurance and capital markets. The RG/BSX Bermuda Insurance Index has become a bellwether indicator of the market performance of publicly listed reinsurance and insurance companies, with both mind and management in Bermuda.
The BSX has already successfully listed seven cat bonds with a combined value of $370 million. The most recent being the Montana Re Principal at Risk Variable Notes cat bond in December 2009.
How specifically does Bermuda’s Amendment Act and the BSX support this market?
As mentioned earlier, under the Amendment Act, SPIs may be established as a special class of insurer. This makes the vehicle creation far quicker, more cost effective and more efficient. Once an SPI is licensed, attention is placed on the original insured, shifting the focus from the SPI to the ceding entity. This is because the SPI is, by definition, fully funded and therefore perpetually solvent. For example, the minimum capital requirement for an SPI incorporated in Bermuda is just $1 and it no longer has the same financial reporting and audit obligations as under the previous classification system, provided the issuer has met all of its own regulatory obligations. Also, provided all documents are presented correctly to the BMA, the SPI approval process can be completed within a week.
In addition, the BSX has specific regulations for ILS listings, which are not always mirrored by other jurisdictions. These focus particularly on transparency, something that has become even more important to the end-investors who, in the wake of the current financial market crisis, are looking for higher levels of comfort through enhanced disclosure.
Why cat bonds?
Cat bonds are an alternative asset class and are a compelling diversification tool due to their low correlation with global stock and real estate markets, being linked instead to natural disasters. It is generally felt that they are likely to be used more frequently as a mechanism for capital raising to ensure sufficient levels of coverage for catastrophic events.
Like every other asset class, they were impacted as a result of the global financial market dislocation. Since then however, the cat bond market has recovered significantly, with the Swiss Re Catastrophe Bond Total Return Index rising 10% in the first three quarters of 2009. Some experts believe “there is easily enough risk transferred in the market today to fuel a $50 billion per year market”.
In a post-Lehman world however, jurisdictions need to be noted for their high standards of regulation and transparency if they are to attract new listings and bring investors back to the capital markets. Investors and issuers will find this at the BSX.
Regulated by the BMA, the exchange’s rules are conducive, not prohibitive, to innovative products. The BMA has recently been commended by Michael Foot in his ‘Final Report of the Independent Review of British Offshore Financial Centres’, and has been appointed as a member of the Executive Committee of the International Association of Insurance Supervisors. The BMA has also set itself a roadmap for achieving European Directive, Solvency II equivalence and aims to ensure equivalence under the US Reinsurance Modernisation Initiative.
The BSX, a full member of the World Federation of Exchanges, is also a “Recognised Stock Exchange” of the UK’s HM Revenue & Customs, considered a “Designated Offshore Securities Exchange” by the US Securities and Exchange Commission and is recognised as a ‘Designated Investment Exchange’ by the UK’s Financial Services Authority.
Bermuda: Strong Economic Outlook and Robust Corporate Culture
Bermuda not only stands out as a leader in risk based solvency regulation for the global insurance and reinsurance sectors, but also as an economic success story, with a “solid track record of macroeconomic stability” at a time when many other countries are experiencing economic problems.
Because of this, Bermuda’s indigenous (re) insurance industry has developed strongly and now supports the global insurance industry, particularly in the US. Bermuda presently provides approximately 40% of US and EU broker placed catastrophe covers and is now the most important offshore supplier of insurance, reinsurance, and payer of property and casualty losses to the US.
Andre Perez, CEO of Horseshoe Group supports this sentiment: “Since Hurricane Andrew, Bermuda has emerged as the foremost property catastrophe reinsurance market in the world and this new SPI regulation is a step towards consolidating this lead by making it easier for cat bonds to be done out of Bermuda”, he said.
Bermuda has a high per capita income of over $97,000 and its “public debt ratios still compare quite favourably with those of ‘AA’ peers”.
For those suspicious of offshore jurisdictions, they should be comforted by the BMA’s strengthened regulations governing money laundering and terrorism financing. An independent Financial Intelligence Agency has also been established to monitor suspicious transactions.
After signing 18 tax information treaties, Bermuda has not only secured its place on the OECD’s ‘white list’ – a high profile recognition that the country is committed to tax transparency and fully implementing established international standards, but it also has a Vice-Chair position on the steering group of the OECD’s new Global Forum.
Stable economic growth and high per capita incomes, combined with easy access to the North American and European markets has proved a catalyst for attracting not just business, but intellectual capital to the island. “In addition to a tailor-made regulatory regime for cat bonds, Bermuda has an ideal geographical location, and world-class service providers – law firms, insurance managers, and accounting firms – to ensure top of the line service”, continues Perez.
It’s close ties to the US markets mean Bermuda hasn’t been completely unaffected by the recent global financial turmoil however, but this has given the Bermudian government and private sector the opportunity to prove its ability to succeed in difficult as well as good times. Unlike some other British overseas territories, Bermuda is financially independent from the UK and it has remained so throughout this international financial upheaval.
The Bank of Butterfield’s successful $200 million preference share offering and successful BSX listing in the first half of this year, guaranteed by the Bermuda government, is a perfect example of Bermuda’s ability to cope on its own and also demonstrates that there is a healthy investor appetite here.
According to Guy Carpenter, between $1.2 and $2.2 billion of cat bonds could be issued in the fourth quarter of 2009, representing 40 to 55 per cent of the issuance for 2009. A fourth quarter accounting for over 40 per cent of any year’s total issuance has only been reached once, in 2004.
Bermuda can play an important role in supporting this dynamic and growing market by providing listing services for these securities on an internationally recognised stock exchange, a regulatory environment overseen by a well respected regulator, with insurance focus, and some of the largest players in the (re) insurance market, all in one place.
Although each of the above in isolation is noteworthy, when combined, they create a unique synergistic result, which results in a very exciting opportunity for Bermuda in the convergence of the capital and insurance markets.
“While we realise that the Cayman Islands have been a leader on cat bonds, we are confident that Bermuda now provides a viable alternative”, concludes Perez.
This announcement was prepared by Greg Wojciechowski, CEO of the Bermuda Stock Exchange.