Bermuda's long-term growth in the insurance market has surged over the past two years, but there are challenges ahead, according to a report by Fitch Ratings.
The Bermuda Market Overview, released in March, concluded that Bermuda continues to develop as a thriving domicile for reinsurance and insurance organizations. This growth is attributable to an attractive regulatory and tax environment, an accumulation of investment capital and underwriting talent, and innovative approaches to risk management.
According to the report, Bermuda's business is split about 55 percent and 45 percent between primary insurers and reinsurers, respectively.
Fitch said the majority of its universe writes business in both the primary and reinsurance markets. About two-thirds of those markets are derived from North American-based exposures, Fitch said, adding that while this is a reasonable geographic spread, North American exposures are "overweighted." By contrast, Asia, Australia and Latin American exposures are "underweighted" in comparison to insurable exposures in those regions.
Fitch attributed the concentration in U.S.-based exposures to Bermuda reinsurers' allocation of large amounts of capital to U.S. business after premium rates increased on property exposures following record hurricane losses in 2005. Fitch also said this concentration reflects the difficulty of Bermuda-based insurers and reinsurers in gaining market access and share in regions outside the United States–particularly in the large Japanese insurance market.
Though the Bermuda market has enjoyed tremendous operating success in the past two years, Fitch said Bermuda insurance reinsurers will face significant pressure on profitability going forward as property-casualty insurance pricing continues to trend steadily downward.
Key near-term challenges facing the Bermuda market include:
o Managing expansion strategies.
Some market participants, such as Montpelier Re, Max Re and Ariel Re, pursued U.S. and European business not historically accessible to the Bermuda market. In the United States, this has meant targeting excess and surplus lines, according to the report.
Doing this requires purchasing a shell company and establishing at least a limited U.S.-based infrastructure to access the business lines through wholesale brokers and managing general agents. It also means hiring key personnel with broker relationships in targeted areas.
While Bermuda insurers have been increasing investments in the Lloyd's market, Lloyd's entities have also begun to establish Bermuda footholds, Fitch said.
o Coping with the market's unique infrastructure challenges.
Fitch said that a key challenge is attracting qualified personnel to Bermuda because of issues including affordable housing and obtaining work permits for non-Bermudians.
o Maintaining Bermuda's tax advantage.
Challenges to Bermuda's tax status by large U.S.-based property-casualty insurers present a potential threat to Bermuda's tax system, Fitch said. Firms such as Berkshire Hathaway, Liberty Mutual, W.R. Berkley Corp. and Chubb view the system as unfair. They are unable to relocate to Bermuda because doing so would require them to re-value assets and in most cases recognize large capital gains.
Fitch said, however, that the effort required to pass legislation is extensive and not likely in the near term. It added that Washington is unlikely to pass legislation that would level the playing field between the United States and Bermuda that would reduce taxes on U.S. (re)insurers.
o Maintaining capital in the current soft market.
With Bermuda's strong capital formation in 2006 and 2007 and soft market conditions, capital management strategies are an increasingly important credit consideration, Fitch said.
The strategies fall into these categories:
? Retaining capital
? Share repurchases/special dividends
? Acquisition/expansion activity
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