Quick Response, Not Tax Advantages Key To Recent Bermuda Growth: Expert

"In Bermuda, its possible to file for approval on a Monday and get your approval on a Friday," he said, although the pre-application planning and investment strategy take time to complete, as does the post-incorporation staffing. "But the actual administrative process is very, very quick."

Mr. Cabral said apart from speed and ease of entry, another major draw for Bermuda is that there is an established group of major industry players already there. "Swiss Re, Zurich Re, PartnerRe, ACE and XL all have major operations in Bermuda, and the infrastructure which has built up around them enables rapid assimilation for new entrants."

While joining the Bermuda marketplace may be procedurally easy, it is by no means lax, he emphasized. "Bermuda operates strict compliance protocols, together with solvency requirements."

For example, any start-up company must capitalize at a minimum of 20 percent of net written premium, he said.
Mr. Cabral said there have been few major problems with insolvencies in the Bermuda market since the problems with third-party captives in the 1970s, which prompted the government to respond with regulations that now ensure light but effective controls.

He explained that a panel of industry players, rather than civil servants, vet people before they come in to set up companies.

"After Sept. 11, there was an immediate perceived and real need for additional capacity," he said, noting that in very swift order, nine new, highly capitalized insurance and reinsurance companies formed and raised $8.1 billion. At the same time, existing companiesACE, XL, PartnerRe, Renaissance Re, IPCRe, PXRE and Alea Reraised $7.1 billion of new capital.

Mr. Cabral said, even before the arrival of the new players, the Bermuda markets total assets came to $23 billion in 2000, which includes insurance and reinsurance companies as well as captives. Capital and surplus amounted to over $10 billion, he said, quoting 2000 figures from the Bermuda Registrar of Companies.

He also noted that net premiums came to $3 billion in 2000, while gross premiums were over $4.5 billion, he said.

The percentage of the net premiums to the capital and surplus amount of $10 billion is rather low, he said, which indicates an under-utilization of capital and an adherence to underwriting standards.

Mr. Cabral predicted that the new Bermudian start-ups would probably end up consolidating and looking off-island for opportunities, just as their predecessors have done, in order to better utilize their capital.

For example, some of the large Bermuda players, such as ACE and XL, have significant interests in Lloyds, he said, noting that Bermuda market players now control about 15 percent of Lloyds total capacity.

Mr. Cabral said one of the ways that Bermuda got where it is, is by providing the platform for experimentation for new products, to which the Bermuda legislative regime quickly responds.

He said the Legislature responded quickly by facilitating laws for:

Segregated accounts (also known as protected cell captives). These vehicles provide a less expensive means to write multiple lines or contracts, each of which is separated by a firewall. This enables smaller captive programs to be more economically managed, he explained.

Transformer companies, which are used to transform insurance risk into an instrument that can be placed into the capital markets as part of the convergence of the capital and insurance markets .

However, not everything is rosy in Bermuda. Mr. Cabral said there were threats. The principal ones, he added, come from the outside. "We have been under intense scrutiny from the OECD [Organization for Economic Cooperation and Development] and the United Kingdom [of which Bermuda is dependent territory]," he said. (The OECD is a Paris-based organization consisting of 29 member states, which promotes policies contributing to the expansion of world trade on a nondiscriminatory basis.)

Both the OECD and the United Kingdom have examined the financial services industries and the soundness of the regulations of Bermuda and other offshore jurisdictions, he said. "Bermuda has passed with flying colors."

However, one of the biggest threats to Bermuda comes from the U.S. Patriot Act, and other U.S. acts, such as Sarbanes-Oxley, which were passed after Sept. 11, he said.

These Acts impose considerable reporting and compliance requirements on U.S. citizens and U.S. companies and their counterparties, wherever they may be, he said. "Consequently, this may dissuade investors."

Further, Sarbanes-Oxley restrictions are making companies nervous, at a public relations level as well as at a regulatory level, about going offshore, he said.

"This could have negative consequences for Bermuda and other offshore jurisdictions," he said. "Fortunately," he added, "Bermudas insurance industry is such a major presence in the worlds reinsurance market that it would be contrary to the interests of the United States to drain the pool of available capacity."

Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.