Taking Risks

By Cathy Duffy

With each decade, there seems to be a shift in the global insurance marketplace that results from an advance in technology, a legislative change or a catastrophe. In the 1960s, insurance buyers found their voice when they began to demand change in the way that insurance was bought and sold. It was in Bermuda that they initiated innovative changes to the global insurance marketplace.

Bermuda's business-friendly infrastructure allowed Fred Reiss to launch his pioneering "captives" concept in 1962. A captive is a limited-purpose insurance company established to finance risks that emanate from a parent group or groups. Sometimes captives may include some of the risks of a parent company's customers as well.

The captives concept took off in the 1970s, when the nature of risk increased exponentially because of significant technological advances, such as completion of the World Trade Center, introduction of the jumbo jet, and discovery of oil in the North Sea. Consequently, rates increased across the board as insurers tried to match premiums with escalating risks, resulting in a hard market.

Risk managers turned to Reiss's captives because they allowed them to insure their own risks and to control their insurance programs. From that point on, captives became a fact of life in the insurance industry, fundamentally altering the duration of insurance cycles.

Following the significant technological advances of the 1970s came a trend in the U.S legal system of handing out unprecedented awards, ultimately leading to a hard market for excess liability coverage. Rumours abounded that a new restrictive policy form called "claimsmade" had been developed without consultation with buyers to replace the occurrence form. A claimsmade policy is a type of liability insurance that responds only to claims for injury or damage brought to the insurer during the designated policy period.

Bob Clements, managing director of Marsh & McLennan, had observed the detrimental effects of a hard market on the brokerage community. He realised that he needed to do something to prevent pandemonium.

Innovation Triumphs
Clements pulled together a team to help draft his policy form, which would be called "occurrence reporting," a hybrid of the occurrence and claimsmade forms. He also set out to find support for a new insurance company called American Casualty Excess (ACE) to offer the new policy. Because his concept was considered to be radical, he encountered great difficulty in gaining the support he needed. Some markets went so far as to call the ACE concept a "self-immolating scheme" and refused to take it for free. Therefore, ACE was initially formed as an association captive because Clements could secure financing only by going back to the buyers.

According to Thorn Rosenthal, a partner with the New York law firm Cahill, Gordon, ACE was the first real risk-bearing enterprise in commercial general liability. It quickly distinguished Bermuda from other markets because Bermuda now could take on the tougher classes of risk. ACE introduced the concept of one-stop shopping and revolutionised purchasing of insurance. Shortly thereafter, XL was formed using the ACE formula to fill another shortfall in the marketplace.

The 1990s saw the Bermuda market shift from focusing on its own marketplace to offering stability to a global economy with profitability and flexibility. In 1993, property catastrophe reinsurer Mid Ocean Re and Hurricane Andrew radically changed the risk profile of the Bermuda market's new incorporations from one dominated by pure captives to one dominated by companies reinsuring unrelated risks.

Mid Ocean Re heralded a new era for formation of insurance companies because it was born of the marriage between established major reinsurers, brokers and capital markets. Mid Ocean Re was easier to form than ACE and XL because of the success of those two companies.

Bermuda quickly became the home of $4 billion in new capital, which allowed several companies to form in response to the marketplace void caused after the devastation of Hurricane Andrew. The capital markets saw then how valuable the Bermuda marketplace was to deploy capital effectively and efficiently.

The Bermuda insurance marketplace branched out to invest in Lloyd's of London to prevent the institution from becoming defunct. It rescued California homeowners who needed to purchase earthquake coverage. It purchased large established insurers and reinsurers globally to expand its platform overseas and to rescue those companies from the brink of bankruptcy. It started a political risk facility called Sovereign Risk and consolidated where necessary to remove any duplication in the market.

Then came September 11, 2001. Bermuda became home to most of the capital deployed to fill the void in the global marketplace after the devastating effects of the terrorist attack. Nearly 100 companies opened in Bermuda, bringing more than $11 billion in capital to the island. Along with these new startups came seasoned underwriters from the London and U.S. markets.

Bermuda was able to show its strength in providing stability to the global insurance industry and the global economy. It was able to respond quickly to the global crisis after this unprecedented catastrophe, replacing lost capital and offering coverages and limits that had been taken away. Bermuda no long was the "Market of Last Resort." It was the Market of Choice.

The Bermuda marketplace now encompasses all aspects of the insurance industry in a small radius within the capital city of Hamilton. It is a significant player in the traditional marketplace. Some may argue that it is the traditional insurance marketplace. Its growth has been achieved by allowing insurance buyers to exercise their right to purchase fair coverage at realistic prices.

As I state in the conclusion of my book, Held Captive, A History of International Insurance in Bermuda: "Bermuda has found itself to be the cockpit and testing ground of prototypes throughout every decade of international insurance since its captive history began. As such, Bermuda has become known as 'the microcosm of the global insurance industry' because of the diversity it has been able to assimilate in such a short period of time."

Find out more about Held Captive.

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