The tenth anniversary of the September 11 terror attacks on the US last month provided time for reflection on how the world has changed for good and ill since then, the “Financial Times” reported this week — saying both Bermuda and the global insurance industry were altered beyond recognition by those events.
Osama bin-Laden’s plot to attack both Washington DC and New York City helped drive tremendous changes on the island and in the industry.
“The most immediate change was that cover for terrorism no longer came as a free add-on with US property policies, sparking the creation of a new market,” reported the British business newspaper. “In the UK, a sustained bombing campaign by Irish nationalists in the 1980s and early 1990s had already made terrorism uninsurable and led to the creation of Pool Re, a semi-public reinsurer of last resort for terror risks.
“But pioneers such as Axis Capital, set up in Bermuda in late 2001, led a commercial response to extreme terrorism-related risks for the US market.
“Axis was one of the wave of reinsurers set up in Bermuda to feed the need for fresh capital in the industry following 9/11. Many of them have gone on to become substantial insurers and reinsurers. This ‘class of 2001′ was not the first such on the mid-Atlantic island, but their effect on the industry in the past decade has been huge.”
As J. David Cummins wrote in his 2008 economic analysis of the Bermuda insurance market, the island’s role in the immediate post-9/11 period cannot be overestimated: “[A] major wave of company formations in Bermuda was triggered by insured losses from the September 11, 2001 terrorist attacks and the resulting shortages of coverage in several lines of insurance. The 9/11 losses marked another event when insurers paid significant claims, resulting in diminished underwriting capacity.
“As expected, several Bermuda insurers and reinsurers played a prominent role in funding the 9/11 losses. ACE and XL were among the top 15 insurers in paying 9/11 losses, and seven of the top 50 insurers paying 9/11 losses were eight were Bermuda companies.
“Following 9/11, capacity was particularly a problem in workers’ compensation, where insurers were concerned about future terrorist events and were unable to limit their exposure to workers’ compensation terrorist risk due to regulatory restrictions in the US. To help restore capacity, at least 10 new Bermuda insurers were formed with total equity capital of about $8.9 billion. The companies in the Class of 2001 included Allied World Assurance, Arch Capital, Axis Capital Holdings, and Montpelier Reinsurance. Catlin Bermuda Re, formed in 2002, is usually considered part of the Class of 2001.
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“Although capital was also raised in other markets following 9/11, a significant share of the total new
capital flowed into Bermuda start-up companies. Several existing Bermuda companies also raised significant amounts of new capital to strengthen their balance sheets and generate additional underwriting capacity.”
The “Financial Times” said this was the first time so much capital had responded so rapidly to a particular event. The new companies incorporated in Bermuda in the post-9/11 period helped drive the adoption of more sophisticated risk-modelling technologies across the global re/insurance sector.
“The most significant change of the past decade has been the evolution of Bermuda as a global insurance centre,” said the newspaper. “A handful of early movers were there before 2001, including Ace, XL and Renaissance Re, but the year after 9/11 was the first time that a whole host of start-ups all responded to the capital drain suffered by the insurance industry from a single event.
“Those companies have grown from nimble players, funded by private equity and focused on specific, usually catastrophe-related risks, into large, diversified insurers with operations in the US, Switzerland and the UK.
“They have often expanded through consolidation and acquisition, so much so that the minimum capital base of a Bermudian group has grown from roughly $500 million, to about $3 billion a few years ago and is now north of $5bn, according to analysis by Clyde & Co, a law firm.”
But the newspaper quoted Chris O’Kane, chief executive of Aspen, which joined the Bermuda start-ups in 2002, as saying he disagreed with this analysis, arguing reinsurers do not have to be of a certain size, especially if they are start-ups or remain focused on specific risks.
However, he thinks there is unlikely to be another wave of Bermuda start-ups soon — such as the second wave of incorporations in 2005 incthe wake of the catastrophic 2004-2005 hurricane seasons when the industry recapitalised itself with a deluge of new companies based in Bermuda including Amlin Bermuda,
Flagstone Re and Validus.
Despite the massive losses the re/insurance industry has seen in 2011 from catastrophes in Japan, New Zealand and Australia, Mr. O’Kane doubts there will be a Bermuda Class of 2012 start-ups to replenish the industry’s reinsurance capacity.
William Pollett, head of development and strategy at Montpelier Re, one of the class of 2001, agreed.
“The majority of private equity didn’t make an acceptable return from the class of 2005 and in many cases had trouble exiting,” he told “The Financial Times.”
“Now, with the reinsurers mostly trading at a significant discount to book value, an investor might as well buy into an existing company with an established franchise. Who wants to turn a buck into 80 cents overnight?”
Since 2001, capital markets have devised faster, often cheaper, ways for fresh capital to move into insurance risks without setting up a company.
This can give money a more efficient route to exploit the significantly higher premiums that can be available after an event. Side-car funds, operated by existing reinsurers in Bermuda and elsewhere, catastrophe bonds and insurance derivatives are among these expanding investment routes.
“There is a much greater expectation that a future event will see short-term money going much more into sidecars,” says Chris Klein, head of market relationships at Guy Carpenter, the reinsurance intermediary.
“There is less institutional and frictional cost, while for [the company buying the insurance], it is pre-collateralised, so there is no counterparty risk.”
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