The Development of the Bermuda Reinsurance Market.

By Dennis J. Higginbottom A.C.I.I.

(First Published in the Spring 2002 Issue of Journal of Reinsurance by the Intermediaries & Reinsurance Underwriters Association)

About the Author: Dennis Higginbottom is Vice President & Secretary of IPCRe Limited, which is a property catastrophe reinsurance company based in Bermuda. Prior to joining IPC, he was Senior Vice President and Director of Captive Operations in AIG's Risk Management Division. He is an Associate of the Chartered Insurance Institute and is a former president of both the Bermuda Insurance Institute and the Bermuda Insurance Management Association. He has worked in Bermuda for the past 22 years.

Introduction

Bermuda is regarded as one of the major insurance and reinsurance markets in the world, particularly for property and liability catastrophe risks. How can this be so for a tiny remote island in the Atlantic? Why have major equity investors put new capital into an industry here? When did it begin and when will it end?

It would be unusual to hear these questions posed about London or other well-established insurance markets. They are just taken for granted because they have been there for such a long time. But Bermuda's road to fame barely spans a generation and, so, it begs the question: "How did all this happen?" Every market has a defining point of some kind, an event or practice, which may not have foretold anything by itself, but can be pointed to in hindsight as being the "beginning". The London market's defining point is probably Edward Lloyd's coffee house, circa 1688, where businessmen met to underwrite hull and cargo risks for London's bustling import/export trade. What are the chances of a world-leading insurance market being named for a man who owned a coffee shop?

Bermuda's "beginning" as an insurance market was probably the quiet passage of the American International Company Limited ("AICO") Act in December 1947. I say "quiet passing", because I doubt that any layman of the time gave this event any significance. I also doubt that even the forethought of the enterprising Bermudian lawyers, bankers and accountants, who had helped and encouraged the formation of what are known as "exempt" companies, included an accurate vision of what we see in Bermuda today. Generally, foreign ownership of companies registered in Bermuda is restricted to a maximum of 40%. Companies had been formed earlier with an exemption from this restriction, provided that they conducted business only outside of Bermuda. But AICO's parent, AIG, was the first significant insurance organization to take advantage of

this situation. Bermuda's tax-free status, stable government and adherence to English law made it an attractive domicile and, since exempt companies operate in a diverse number of industries in addition to insurance, this concept is the foundation of internationally sponsored business on the island and in other offshore domiciles.

1950's

In 1947, AIG was a collection of insurance agencies around the world representing both U.S. insurance carriers and its own life insurance companies. AICO provided management services to the two pillars of AIG's corporate structure outside of the U.S., American International Underwriters Overseas ("AIUO") and American International Reinsurance Company ("AIRCO"). AIUO was the parent of the foreign general insurance agency operations and AIRCO owned the life insurance companies and wrote internal and external reinsurance. By the middle of the decade, the group had become one of the largest private sector employers on the island with around 300 staff.

Although AIG's founder, C.V. Starr, was happy with his choice of Bermuda as a base for non-U.S. operations, it would take another decade and another entrepreneur to create a second defining point for the international insurance business on the island.

1960's

Fred Reiss, who is credited with coining the term "captive", formed a management company in Bermuda in 1962, International Risk Management Limited ("IRM"). With the help and support of individuals in the local banking, accounting and legal professions, he persuaded many of his corporate clients to form captives, to free themselves from an insurance market which was perceived to be unresponsive to their needs. Reiss showed his clients how to use the captive mechanism to capture some of the profits from their insurance expenditures. By domiciling the captive in Bermuda, those profits could accumulate free of income tax and, therefore, accelerate the growth of capital in the company. Over time, the captive would be able to retain a larger share of its parent's risk and, through prudent use of reinsurance, create flexibility and stability in the insurance-buying process in what was a cyclical business.

Understandably, this concept was not popular with either traditional insurers or brokers, who viewed it as a movement which would cut them out of a significant portion of business. Consequently, Reiss found it difficult to get broad acceptance of his ideas. The slow rate of captive development continued throughout much of the decade until, disturbed by instability in the Bahamas, several oil companies decided to move their captives to Bermuda. These large multinational corporations were clients of America's multinational insurance organizations, the most prominent of which were AIG, INA and AFIA. The latter two were later merged into CIGNA, whose general business was, itself, recently merged into ACE. Through their networks of agencies around the world, they provided facilities to allow the captives to reinsure their parent-related business and even provided management services to some of the captives.

1970's

Although the captive concept was generally unpopular with underwriters and brokers, it was clear that large corporations were making it work to their advantage. The underwriters were losing some premium but they were also further removed from the loss frequency on these accounts and the inevitable dollar-swapping exercise that this entailed. In effect, they were being forced to give higher discounts for the large deductibles, or captive retention, that these companies could maintain. Similarly, the brokers were losing some commission on the direct premiums but soon realized that they could recover a portion of this, if they leveraged their relationship with the parent and placed reinsurance for the captive. Not surprisingly then, the major brokers established offices in Bermuda and began to use these facilities to gain a competitive advantage, taking part in what was to become one of the major trends in commercial insurance. As markets hardened in commercial lines and as brokers gained in experience, they began persuading more of their clients to form captives and to appoint the broker's Bermuda office as manager. Bermuda became the dominant domicile of choice for captives, a position it maintains today. A.M. Best Company reported that, in 2000, Bermuda held 31.5% of the world's total captive market, estimated at 4,458 companies, more than twice as many as its nearest competitor, the Cayman Islands.

Before IRM's captive management business had really managed to take off, Reiss was being faced with competition from major brokers. However, he had fathered the captive concept and, together with the multinational carriers providing policy issuance and reinsurance services, had greater experience in structuring captive programs. IRM also established its own captive reinsurance company, Hopewell, through which captives under its management could obtain reinsurance protection and also share in its ownership.

Recognizing the immediate and future training needs of the influx of people into the business, the Bermuda Insurance Institute was established in 1970 and is funded entirely by the local insurance industry. For more than thirty years, the Institute has provided formal classes and tutoring in subjects prescribed by the Chartered Insurance Institute and, later, the Insurance Institute of America, for their respective professional qualifications. It also administers its own certified introductory qualifications and organizes seminars on topics of local interest. Until 1996, when the Bermuda Foundation for Insurance Studies was created, the Institute was the only industry-sponsored educational facility on the island.

In addition to owning their own captives in most cases, a group of U.S. and European oil companies formed OIL Insurance Limited in 1971 as a vehicle to pool their property risks. Although organized as a mutual, most of its members used the OIL coverage as part of the reinsurance protection behind the captive. Since its policies were limited both in value and scope, "wrap around" reinsurance contracts were placed in the key North American and European markets, which provided difference in conditions and excess limits coverage.

In tandem with the growth in the number of captives came the development of the "rent-a-captive" concept. Large books of U.S. domestic casualty business had high frequency and low severity profiles, presenting the same dollar-swapping scenario that had driven so many companies to form captives to write their property risks. In 1978, Inter-Hemispheric Reinsurance Co. Ltd. was formed as a joint venture by AIG to write finite risk insurance for its commercial clients. Retaining the primary layer of auto, general liability and workmen's compensation, and buying per occurrence and aggregate excess of loss reinsurance, it was able to isolate the premium allocated to the first layer for the client's account. The client could then benefit from the underwriting result generated at this level and also share in the investment income attributed to unearned premium and outstanding loss reserves. While there were several rent-a-captive vehicles in existence, a key element was the ability to provide admitted policies for statutory coverage and the only other Bermuda-based company able to do this with a significant volume of business was Mutual Risk Management.

All of this activity brought the captive concept to the fore. The rent-a-captive mechanism also demonstrated the fact that captive programmes were not limited to the high premium levels of Fortune 500 companies. Having initially taken a defensive posture in setting up captive management companies, the major brokers saw that they were now in a position to use their facilities to attract new clients. Middle-tier brokers realized that their own lack of expertise and management facilities rendered them vulnerable to attack, so they sought out independent insurance managers to provide the required advice and services. The small number of commercial reinsurers domiciled in Bermuda also began to take an interest in the reinsurance requirements of a growing captive community.

Regulation

The growth that was taking place in Bermuda meant that demand for legal, accounting and banking services also increased. With a small population, Bermuda could not provide the trained personnel required and people with the required skills had to be imported. Within a relatively short space of time, the Bermuda insurance industry had created a significant presence, not only in a physical way but in the minds of people in governments and financial services around the world. It was time to create some rules by which the Bermuda government could monitor and control this burgeoning sector of the economy. In fact, it was viewed by many that further growth could not take place in a beneficial way without regulation of some kind.

Freedom is a wonderful thing. For businesses, freedom from regulation is Nirvana, with a significant and certain benefit to the bottom line. However, notwithstanding the cost, regulation can have a beneficial effect on business. In the insurance industry, regulation has no better example than in the United States and, more recently, in Europe and other advanced nations. The cost of compliance is usually onerous but, when it comes to commercial transactions, regulation is often irrelevant. Having developed the framework to create bureaucracies in order to protect citizens from the power of big business, regulations are then sometimes applied to transactions between businesses. Recognizing the restrictions that this approach can impose, certain domiciles have developed regulatory frameworks which are friendly to transactions between corporations, those parties being viewed as being of equal negotiating strength.

The international insurance business in Bermuda operated for nearly three decades on the basis that complete freedom of regulation was a desirable thing to have. Then the government of Bermuda, and the companies domiciled here, recognized that, in order to garner more respect and acceptance by overseas regulators and potential clients, some form of regulation was required. As a result, the Insurance Act of 1978 was passed, in order to provide a basis for what, in essence, would be a self-regulating industry. The regulations under the Act prescribe the form of statutory reporting, minimum capital and solvency ratios and other procedures to be followed in the conduct of insurance business on the island.

The 1978 Act provided the framework for a partnership between government and the private sector which has been the envy of other domiciles and has presented a successful model to be copied. Bermuda's small size played a vital role in this success, enabling easy consultation between government ministers and senior civil servants and their private sector counterparts. The ability to pick up the telephone and instantly reach a government minister was something rare in other communities. In addition to enabling a regulatory regime, the Act also prescribed the establishment of advisory bodies, the most significant being the Insurance Advisory Committee ("IAC"). This Committee examines and approves every application for an insurance license, whether as an insurance company, broker, agent or manager. The IAC consults with the Bermuda Insurance Management Association, the Bermuda International Underwriting Association and the Bermuda International Business Association on matters affecting the industry as a whole and each of these bodies has a representative on the IAC.

The Bermuda Monetary Authority vets the background of individuals proposed as directors of new companies and, provided the IAC has no objection based on the business plan, approves the incorporation of the company. Once incorporated, the company is subject to the Companies Act of 1981, which provides the rules by which companies are operated. This legislation is frequently updated, in order to keep pace with developments in the local and international business environment.

Tax Issues

The driving force behind the next significant phase in the development of a reinsurance market on the island was directly related to the U.S.-owned captive population. In addition to regulation, tax issues also played a role in encouraging either vertical growth or the market innovations for which Bermuda is now well-known. The Internal Revenue Service in the United States has long disputed the tax position taken by corporations in insurance transactions between the parent or its subsidiaries and a foreign insurance company under its control (captive). In its famous Revenue Ruling 77-316, it denied the deductibility of premiums paid to a captive, arguing that, since the parent and the captive were members of the same economic family, there was no shifting of risk outside

of that family, a necessary element in the definition of insurance. Therefore, the captive was not to be considered an insurance company for Federal income tax purposes, and only that portion of the premium retained by unrelated fronting companies or reinsurers could be treated as a tax-deductible expense. With limited success in the courts, the I.R.S. later modified its theory to indicate that risk shifting could occur in a captive, depending on the number of unrelated insureds and associated premium volume.

The 1977 Carnation case was the first victory for the I.R.S. and sent a minor shock wave through the captive community, despite the fact that it did not represent an endorsement of the position taken in Ruling 77-316. In its later modification, the I.R.S. had not indicated how much unrelated business would need to be in the captive, in order for related premiums to be treated as a tax-deductible expense. However, this was generally assumed to be a significant number up to fifty percent. While there were many other issues raised about the structure and operational aspects of captives, the main effect was to encourage captive owners to look for unrelated business to write.

1980's

Many of the direct commercial writers, whose largest clients were captive owners, were willing to establish quota share treaties to provide unrelated business to captives. This business was in great demand and, given the successful underwriting results of the companies providing it, was considered a safe way of achieving the objective. However, for some of the larger captives, owned principally by oil companies, the demand outstripped the supply. The result was that their operations were expanded to allow true open market business to be written. Underwriting teams were established to focus on this business by recruiting from the U.K. and U.S. markets and many job opportunities for Bermudians were also created.

The main players in this developing segment of the Bermuda market were Insco (Gulf Oil), Walton (Phillips Petroleum) and Mentor (ODECO Drilling). On a more selective basis, additional unrelated business was also sought by Ancon (Exxon), Bluefield (Mobil), Brittany (Petrofina), Heddington (Texaco) and Omnium (Total). Surrounding these companies were a number of smaller reinsurers and captives, hoping to capitalize on the influx of business to the island. For a while, this seemed like an easy solution. The new-found wealth of these companies enabled them to lure experienced employees from other local companies and garner the best students of the Bermuda Insurance Institute. Brokers flocked to the island from the U.S. mainland and London to feed what appeared to be an insatiable appetite for business.

Unfortunately, rates on the underlying business were softening and the hitherto predictable four-year cycle was not turning. Much of the business was retrocessional in nature and the lag on reporting and cash flow was greater then than it is today. When the business inevitably began to show losses, for some it was too late for corrective action.

The captive owners, who neither really understood nor wanted to be in the insurance business per se, realized that they now had a subsidiary that could bleed capital out of the organization in far greater amounts than it could save in tax expense. Phillips injected an additional $50 million into Walton following a review of its reserves and sold the company in a management buyout. Mentor was forced into the largest captive liquidation up to that time. The other companies ceased writing open market business aggressively and are still running off the poor business, while continuing to fulfil their original mission to their owners.

One local company also suffered from the long soft market cycle. The Bermuda Fire & Marine involvement with the ill-fated HS Weavers pool threatened the survival of the company. Although the company withdrew from the pool in 1983, losses in the run-off continued to mount. The high-profile court case challenging BF&M's later reorganization was finally settled in 1999.

1986 Tax Reform Act

The 1986 Tax Reform Act, while not changing their mission, changed the place where it was to be carried out by some captives. The Act subjected all underwriting and investment income earned by a U.S.-owned captive to federal income tax payable by the parent as if it had been earned in the United States. This effectively removed all tax advantages previously gained by domiciling the captive offshore. Many of the highly-capitalized captives, having built up substantial surpluses, moved those funds into new companies formed in the United States, notably in the new captive domicile of Vermont, and continued operations from there. Ancon paid a dividend to its parent of more than $1 billion. Heddington remained in Bermuda and later used its surplus as the source of financing for Texaco's overseas exploration activities.

Capacity Changes

The downward pressure on rates continued for an unprecedented period until the middle of the decade. This, together with an increasing level of litigation, extremely high jury awards and judgements which, in essence, re-wrote policy wordings, created a severe shortage of capacity for liability coverage. Led by Marsh & McLennan, a group of industrial clients contributed $200 million of capital to form Ace Limited. Ace offered liability limits of up to $100 million in excess of $100 million on a modified "claims made" policy form. In 1986, Marsh again led investors to form XL Limited to write limits of up to $100 million in excess of $25 million, on the basis that other markets were still willing to provide up to $25 million of coverage. Also in 1986, Corporate Officers & Directors Assurance Ltd. (CODA) was formed by Johnson & Higgins and a number of their clients to provide Directors and Officers liability coverage. Both Ace and XL would later play a major role in the Bermuda reinsurance market.

These new formations turned out to be a windfall for local brokers, whose source of business was shrinking considerably. In an attempt to avoid a potential challenge from the I.R.S. that they were engaged in trade or business within the U.S., both Ace, XL and

CODA established a policy dictating that all U.S. business had to be placed by brokers domiciled in Bermuda. Therefore, the major brokers channeled all such business through their Bermuda offices, sharing the brokerage fees, and smaller brokers sought out independent Bermuda brokers to place their clients' business.

In 1988, Steven Gluckstern and Michael Palm, neither of which had much experience in the industry, managed to persuade Zurich Insurance Group and other investors to capitalize Centre Re Limited with $250 million. Centre Re's brief was to write finite reinsurance for insurers and reinsurers, maximizing investment income and minimizing underwriting risk. Several other finite reinsurers followed: Scandinavian Re (Sirius International), Commercial Risk Re (SCOR), Accord Re (CNA), Stockton Re (Commodities Corp.) and Inter-Ocean Re (various reinsurers). Richmond Insurance Company, Ltd. (AIG), the successor to Inter-Hemispheric, Overseas Partners Ltd. (UPS) and Western General Insurance Co. Ltd. (Hyatt) were already writing finite contracts but Centre Re drew the focus for this business with its unconventional management style and large capital base. In 1991, Centre Re purchased Pinnacle Re, which had been one of the larger writers of time and distance contracts for Lloyd's syndicates.

1990's

The insurance market's growth up to this point had seen the roller coaster ride of the reinsurance business and several innovations, all underpinned by the inexorable increase in the number of captives being formed. All but a few captives and commercial reinsurers were surviving very nicely in spite of the various attacks on offshore business and the rate swings in the reinsurance market. The success of Ace, XL and the finite reinsurers had brought back some respect for the island's insurance business following the demise of the "innocent capacity".

Impact of Andrew and Northridge

When Hurricane Andrew struck southern Florida in 1992, an already weakened catastrophe reinsurance market was hit harder than it had ever been. A succession of record-breaking events since 1987 had severely eroded the market's ability to respond to a loss of Andrew's magnitude. A Guy Carpenter study estimated that the reduction in capacity for catastrophe risk following Andrew was close to $75 billion or 30% of what had been available in prior years (Figure 1).

Realizing a need to create more capacity, Marsh & McLennan and several other investors formed Mid Ocean Reinsurance Company, Ltd. Within a year, seven other property catastrophe writers were formed and, after their first full year of underwriting in 1994, total capital for this segment amounted to almost $4.3 billion (Figure 2). The response to this new capacity was mixed. Cedents who were searching for capacity to fill the void after Andrew were relieved to see that it was appearing so quickly. It was estimated that the Bermuda market would capture 30% of the worldwide property catastrophe premium. Adding to the excess liability and D&O capacity available on the island, Starr Excess and Chubb Atlantic were also formed in 1993. Some people in the industry were skeptical about the motives of the investors and questioned whether these companies would be around for the long term. Although each of the new companies had at least one insurance industry sponsor, they were all supported by institutional investors, who were no doubt looking for the opportunity to make high short-term returns. At some point they would want to liquidate their investment and capture the profit and the exit strategy was to take these companies public at an appropriate time.

The new catastrophe companies were soon tested, when the Northridge earthquake struck in January 1994. Northridge became the second largest insured loss after Andrew and reserves are still on the books. After a couple of relatively benign years, and with the stock markets hungry for new investments, thoughts were being turned to taking the new reinsurers public. In addition, rates were declining in most lines of business and there was more competition for the specialty areas of Ace and XL. Both companies had already started to expand their operations into multi-line businesses.

Insurance Amendment Act 1995

The appearance of such large entrants to the Bermuda market caused regulators to consider the adequacy of the 1978 Insurance Act. The conclusion was that there should be a tiered system of regulation, which would recognize different rules and levels of oversight appropriate to the activities of the variety of companies domicile on the island. Four classes of insurance licenses were created:

Class 1 Captives writing only the risks of related companies (single-owner "pure" captives).

Class 2 Captives writing less than 20% of unrelated business (single and multi-owner captives).

Class 3 Companies writing more than 20% unrelated business (commercial insurers/reinsurers, finite reinsurers and rent-a-captives)

Class 4 Companies writing property catastrophe reinsurance or excess liability insurance.

The new regulations came into effect at the end of 1995 and maintained the status quo for the core captive population (Class 1), which had provided the basis for development of Bermuda's financial infrastructure. For Class 4 companies, the regulations created more onerous compliance than that required by most onshore jurisdictions, including having minimum capital and surplus of $100 million. The tiered regulations made a clear distinction between captives writing "in-house" business and, therefore, requiring little supervision (Classes 1 and 2), and companies writing open market business (Classes 3 and 4). While all classes have minimum capital and solvency ratios, the regulation of Class 4 companies is maintained at a much higher level due to the nature and scope of the risks they underwrite.

The financial strength of the catastrophe companies was tested again in 1998, which was reported to have had the fourth highest amount ever of worldwide catastrophe losses. The litany of major loss events did little to stem the downward pressure on rates and, to make matters worse, 1999 produced record-breaking storm losses in Europe, of which the Bermuda market paid a significant share.

The 21st Century

The period from 1996 to 2001 was one of expansion and diversification. Ace acquired Tempest Re, Cat Limited, Westchester Specialty Group (now ACE USA), Capital Re and, with the purchase of CIGNA's property and casualty operations, became an instant multinational organization. During the same period, XL acquired Global Capital Re, Mid Ocean Re, NAC Re, Winterthur International and a controlling interest in Le Mans Re. Partner Re acquired SAFR, Markel purchased Terra Nova and the Trenwick Group acquired La Salle Re. Once acquired, the former specialist reinsurance operations also started to diversify into additional lines of business.

The Lloyd's market, which had lost many of its individual underwriting members, found an inflow of corporate capital and, ironically, given the perceived competition for dominance between the two markets, most of this capital came from Bermuda-based companies. ACE acquired the Methuen, Ockham and Tarquin managing agencies. Through its purchase of Mid Ocean Re, XL also acquired the Brockbank managing agency. Other Bermuda companies acquired Lloyd's interests and, in 2000, the Bermuda market as a whole controlled more than 20% of Lloyd's capacity of approximately $15 billion.

In addition to the growth through acquisition, the market also saw the development of some new products. Specialty life and annuity reinsurers, Annuity & Life

Re and Max Re, were formed to take advantage of increasing demand for reinsurance from U.S. life insurers. Commercial Risk Re, ACE Tempest Re and XL (Element Re) created divisions to write insurance and reinsurance products protecting against the financial consequences of adverse weather conditions. Lehman Re and Arrow Re were formed as "transformer" vehicles for catastrophe bond issuances.

On the captive front, the Segregated Accounts Companies Act 2000 was passed, providing a regulatory framework in which so-called "protected cell" companies could operate. It had previously taken private acts of parliament to enable the island's rent-a-captives to achieve the legal separation of their clients' assets and liabilities from other accounts under management.

By 2001, rate increases were being achieved across the board and many companies were expecting to produce record results. That expectation changed dramatically on September 11, with the terrorist attack on the World Trade Center. It appeared from the outset that this was going to be the largest insurance market loss ever and this was borne out by the public disclosure of reserves following the event. Inevitably when early estimates are made, upward revisions followed, until total market estimates ranged between $40 and $70 billion, depending on the scale of legal settlements and business interruption losses.

In the last quarter of the year, many companies determined to raise additional capital, both to replace what was expected to be lost on WTC claims and to take advantage of higher rates anticipated on January 2002 renewals. Including new companies formed, the total additional capital raised by the Bermuda market was approximately $9.8 billion, more than twice the amount raised after Hurricane Andrew. (Figure 3)

The nature and magnitude of the WTC event caused a general re-examination of the definition of risk and, predictably, insurers and reinsurers moved to exclude terrorism from their standard commercial contracts. The U.S. Congress was pressured to implement a federally-sponsored terrorism insurance plan and the House of Representatives actually passed a bill. The Senate discussed its own bill, which became bogged down in the debate of litigation provisions and ran out of time when Congress adjourned for the Christmas holiday. The NAIC proposed a model terrorism exclusion provided by ISO and all states approved its use except California and New York.

In the absence of a government programme, reinsurers were asked to consider modified exclusions, which were intended to avoid an occurrence of similar scale to the WTC attack and yet allow coverage to be provided to small to medium-sized businesses. In the event, reinsurers maintained a general exclusion for commercial risks, which was modified for contracts covering personal lines. However, Bermuda reinsurers, in common with other reinsurance markets, are not averse to providing terrorism coverage, provided it is appropriately priced.

Conclusions and Predictions

Since the boom and bust days of the 1980's, a more disciplined and financially sound reinsurance market has emerged in Bermuda. This has not been achieved without some casualties and, no doubt, the island will continue to have its share in the future. Until tiered regulation was introduced, it was only possible to measure the total size of the market (Figures 4 & 5). The local authorities and service providers had always emphasized the quality of companies represented but, being predominantly a captive domicile, the focus had really been on the number of companies registered in Bermuda. Although statutory returns were made, the total capital and premium writings for open market companies was masked by the existence of so many captives and the presence of AIG's relatively large subsidiaries. In addition, the fact that surplus was allowed to accumulate in captives without the shareholder pressure to have this fully employed, helped to produce very conservative premium to surplus ratios.

With so many of the key companies being publicly traded, the size of the market is much more transparent and it is clear that this can now be considered a mature market. The tiered regulation has also allowed a better picture to be developed of the different segments of the market (Figure 6). Since its beginning, Bermuda has been the incubator for many innovative insurance techniques and, provided the environment remains friendly and accommodating, that trait is likely to continue. Physically, the island could not support the labour-intensive underwriting, marketing and distribution activities required by more general insurance operations and so future development is likely to continue to focus on reinsurance and niche insurance products.

Due to the size constraints of the island's infrastructure, further expansion is likely to take place overseas, with Bermuda taking a greater role as a capital base. Although positive for the island's economy, this will result in even more scrutiny from foreign governments and regulators. For the moment, the island has passed OECD benchmarks as a financial centre and attacks on companies re-domesticating to the island have waned. However, future challenges are inevitable.

In its maturity, Bermuda still has the advantage of not having developed the "baggage" which burdens other markets. Nevertheless, the insurance industry generally has so often been accused of having a short memory, making it prone to repeat the mistakes of the past. Politics and international regulation notwithstanding, the market's biggest challenge in the future may be to avoid this "poor memory" syndrome being visited on Bermuda.

[c] 2002 D.J. Higginbottom

IPCRe

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