Bermuda strengthens its grip as a choice destination for global reinsurers: a half-dozen players have set up shop on the island since Sept. 11, 2001. (Global Insurance).

As the global reinsurance industry struggles with losses in the tens of billions of dollars in capacity over the past two years, Bermuda's favorable regulatory environment is once again attracting new players.

At least a half-dozen companies have set up shop in this group of tiny islands in the west Atlantic Ocean since the terrorist attacks of Sept. 2001, and other reinsurers have tapped into Bermuda's friendly financial climate by expanding their presence in the region.

"Sept. 11 just heightened the need and the new players saw it as an opportunity," says David Priebe, managing director at Guy Carpenter & Co. Inc., a reinsurance broker based in New York City. "The new reinsurers have taken a positive and beneficial stance and filled in critical areas. They saw a market void and they're filling it."

A Crowd of New Entrants

New entrants into Bermuda include AXIS Specialty Ltd., set up by MMC Capital Inc., Greenwich, Conn.; Endurance Specialty Holdings Ltd.; Allied World Insurance Co., whose backers included Goldman Sachs Group, Chubb Group of Insurance Cos., and American International Group; Arch Reinsurance Ltd.; Montpelier Re, founded by White Mountains Insurance Group, Ltd. and Benfield Group Plc.

Yet the entry of new players in Bermuda and London still doesn't cover the overall loss in capacity. Swiss Re estimates that the influx of new capital into the insurance and reinsurance markets last year came to about $30 billion--a drop in the bucket compared to the $180 billion that was withdrawn in 2001 and 2002.

"That ($30 billion) sounds like a big number, but $180 billion dwarfs it. The new capital isn't enough to replace the old," says Marc Lescault, Swiss Re's8 head of the Americas Division underwriting.

Reasons for Global Crunch

The reasons behind the global capacity crunch range from the industry's lack of underwriting discipline in the late 1990s to the accelerating development of asbestos claims to plummeting returns in global equity markets.

By the beginning of the 21st century, deteriorating industry results created by long-tail lines like asbestos and environmental pollution had already created a need for new capacity among reinsurers, industry experts say. Then the huge losses resulting from the destruction of New York City's World Trade Center in 2001--which kept accumulating through 2002 and ended up tallying $45 billion-only expanded the void.

Meanwhile, crucial returns from valuable investment income began drying up as equity markets started their meltdown in 2000 and interest rates initiated a downward slide that has resulted in the lowest rates in four decades.

"Reinsurers were pulverized by the drop in equity holdings and investment income," says Frank Fortunato, chief executive officer at the Catastrophe Risk Exchange Inc., also known as CATEX. With offices in Princeton, NJ., and London, CATEX is an Internet-based, business-to-business exchange for insurance, reinsurance, and risk management

"I think now there's a return to strict underwriting standards," Fortunato adds. "Three to four years ago, the 30 percent to 40 percent returns in the stock portfolios could hide the underwriting mistakes."

In addition, the global economic downturn and slew of corporate scandals that began rocking corporate America in the fall of 2001 led to skyrocketing corporate bond default rates that sharply reduced reinsurers' investment income. According to figures provided by Swiss Re, the collapse of Enron alone cost the industry $3 billion while other "problem bonds" hit the industry with a $7 billion loss.

Industry reserves kept dwindling as losses from long-tail lines upset company balance sheets--leading many old line insurers to pull out of the market.

"Between 1998 and 2001 reinsurers began losing their shirts," says Marc Grandisson, senior vice president and chief actuary at Arch Reinsurance Ltd. in Bermuda. "Companies got sick of losing money and the capacity then started shrinking."

Big Names Affected

The industry's most significant loss was the closure of the world's sixth-largest reinsurance group, Gerling Global Re, in October after an unsuccessful attempt to find a buyer for the company. According to a report prepared by The Benfield Group, a reinsurance broker headquartered in London, other withdrawals and reorgarnizations in the global reinsurance market in 2002 included the restructuring of Cox Insurance, of Lloyd's, and its withdrawal from reinsurance and commercial lines reinsurance; Munich Re's decision to reorganize its U.S. reinsurance business and close its reinsurer Victoria Ruckversicherung, which is based in Germany; and the St. Paul Companies' decision to spin off its reinsurance business last November into Platinum Underwriting in New York City. The St. Paul, Minn. insurer still retains a 15 percent stake in Platinum.

And in January, AXA Re announced it would close it U.S. subsidiary AXA Corporate Solutions Reinsurance Co. and write U.S. risks directly onto the balance sheet of AXA Re at its Paris headquarters.

Optimism Ahead

Yet the new players are optimistic that the stricter underwriting discipline in today's marketplace combined with pricier premiums will let them make money. Many of the new entrants started writing property/catastrophe risks, and then diversified into other risks.

"A lot of them are focusing on the property catastrophe business because it's easy to get into quickly," says Lescault of Swiss Re. And many of the players have gone into the insurance and reinsurance business in order to more quickly use the capital at hand. "You have access to more business with an insurance company," Grandisson says. "With reinsurance it can take three years to fully use the capital you've been given."

Adds Grandisson, whose company started in Bermuda with $1 billion in capital in October of 2001: "It may seem counterintuitive when for the past two to three years, some companies have been shedding their reinsurance business.

"But there's been few times, 1985-1986 for casualty and 1993 for property, where there's been such an opportunity for new business. Now, we're better able to drive the terms."

Those terms have meant asking insurance companies to increase their retention 1evels, paying higher premium prices for the risk they do pass onto their reinsurers, and accepting restrictive wording and exclusions. Some insurers have just simply bought less insurance.

"Whenever there's a move to more adequate pricing, insurers and clients will ask themselves 'How much insurance do I really need?"' says Lescault. "It's really a positive thing because it aligns everyone in the business and it's a hallmark of a healthy market."

Yet shrinking capacity doesn't mean no reinsurance. Reinsurance is usually available--especially if the price is right.

"There are some areas in which there are limitations, but in general there's a trigger price and that will attract a lot of capacity," says David Furby, president of Ace Global Re, which is based in Bermuda.

Renewals' Upward Trend

Industry experts say renewal premiums generally maintained an upward trend this year, although not at the same level as the January 2002 renewals. Capacity for property catastrophe risks stemming from natural perils is generally sufficient and prince increases in the January renewal season averaged between nothing and 10 percent. But casualty risks are where the capacity crunch can appear, especially in professional lines such as directors' and officers' liability--where premium increases can reach in the triple digits.

"Reinsureis are very selective," said Peter Zaffino, a managing director at Guy Carpenter & Co., adding that insurers are extremely wary of the risks associated with providing cover for the directors and officers of Fortune 1000 companies. "There are substantial rate increases and reductions in the limits given by both insurers and reinsurers."

The industry's reluctance to assume D&O risks stems from the slew of corporate scandals that have grabbed media headlines and sent more shareholders into the courtroom. The industry is also struggling to make up for losses created by the generous pricing and coverage practices of the last soft market that ended in 2000. During that time, risk managers were able to obtain generous terms such as three-year contracts, 10 percent premium increases and small deductibles.

"There's still not enough capacity in D&O ... prices can go up by 100 percent to 200 percent," says Robert Meder, a director at Hagedorn and Co., a retail insurance broker in New York City.

While not as severe as the squeeze in the D&O market, a capacity crunch also exists in the errors and omissions area--with reinsurers asking for strong double-digit increases. Some large law firms are experiencing rate increases of more than 50 percent, Zaffino adds. Workers' comp cover is also suffering as inadequate pricing has combined with increasing claims costs to create a capacity crunch and hefty price hikes. While rate increases for primary workers' cover averaged 10 percent to 30 percent during the January renewal season, premiums for excess workers' comp cover tallied between 20 percent to 50 percent, according to figures supplied by Guy Carpenter & Co. But premium hikes and policy terms can vary substantially depending upon the line of coverage, the type of risk, and the insurer's historical underwriting data and recent results.

Discipline Rewarded

Whether a player in the insurance or reinsurance markets, everyone is stressing that underwriting discipline remains the key to posting a profit and strengthening industry reserves. "Companies have to get back to basics to bring their underwriting operations to profit," Lescault says.

"Companies are once again reliant on underwriting, not investment income," adds Furby of Ace. "It's the essence of what we do: to underwrite risk."

Paula L. Green is a freelance writer and editor based in New York City.