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Risky Business A U.S. and Bermuda Under 40s (Re)Insurance Collaboration Inaugural Edition |
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Reflections of a Global Trend By Scott Gemmell
Scott Gemmell of Captive Solutions, Marsh, gave Captive Review his perspective on the current state of Bermuda’s captive insurance sector. Despite soft market conditions, Bermuda continues to maintain its position as the largest domicile in the captive insurance industry. A stepping up of compliance, along with a heightened investment into risk management, has ensured that, after the modest, yet abated, growth seen over 2008, Bermuda is perfectly poised to seize opportunities if, or when, speculations over the hardening of the insurance markets eventually materialise. Scott Gemmell, of Captive Solutions, Marsh, offers Captive Review an insight into what is being done for captives on the islands to fend off the ongoing pressures of a declining economy. Captive Review (CR): Scott, how would you characterize the current state of Bermuda’s captive insurance company market? Scott Gemmell (SG): What’s been happening in Bermuda is a reflection of a global trend. While captive formations have generally increased at a relatively steady pace over the past several years, we’ve seen a noticeable decline in the rate of growth of formations that began with the softening of the overall commercial insurance market dating to early 2004. Yet, despite the soft market conditions, Bermuda continues to maintain its position in the marketplace as the largest domicile in the captive insurance industry. According to the latest report from the Bermuda Monetary Authority “BMA”, April 2008, Bermuda insurance market underwriting results show that the country’s insurance sector is in good condition. According to the BMA, as of 31 December, Bermuda had 40 new insurance company incorporations in 2008. The majority of these new incorporations were Class 3 insurers, a combination of captive and commercial insurance companies. We believe this relatively modest trend of new incorporations will continue into 2009. CR: What factors do you see as possibly influencing Bermuda’s captive insurance industry in 2009? SG: Many experts across the commercial insurance industry anticipate the beginning of a hardening of the market in 2009. We believe that such a development could start to trigger an increase in creation of new captive insurance companies or the expanded use of existing captives as risk managers look for alternative solutions to finance their risks. On the other hand, the tightening of global credit markets and general movement among large businesses to more conservative investment strategies could influence how some organizations approach their decisions about establishing new captives. In the current economic climate, we also are seeing an increase in mergers and acquisitions, which may result in the consolidation of risk financing vehicles and a reduction in the overall number of captives. We believe that Bermuda’s insurance industry, which historically has been influenced by the activity of the global insurance market, will look to work with captive owners and captive managers to develop innovative risk management strategies and assist organizations in overcoming these financially challenging times. CR: How are Bermuda-domiciled captives trying to cope with the current economic situation? SG: The current economic crisis has had a significant impact on the global financial services sector, as well as on how businesses in all industries approach their financial programs and investments. As a result, an increasing number of businesses are now re-examining the long-term strategy of their captives to help ensure that their financial and strategic objectives are being met. As part of this process, Marsh is working with captive owners to review their overall risk financing strategy to help ensure they have the optimal risk retention levels and to ensure that they are receiving adequate premium savings. In some cases, captives established in prior years have continued operating as their parents have gone through leadership and strategic changes -- and the original reasons for incorporating the captive may no longer be relevant. With many businesses examining carefully their capital resources and allocations, businesses need to make certain that their captives continue to deliver maximum value to the parent. CR: Can good risk management practice help mitigate the impact of the economic downturn? SG: One of the most understated benefits of captive insurance companies is the ability to realize immediate financial results for effective risk management practices. As has been proven many times, investing in effective risk management can reduce the frequency and the cost of losses. While the commercial insurance markets may take years to respond to a company’s risk improvements, when the captive is the insurer, the captive and its parent company typically can realize the benefits on an immediate basis. Many risk managers currently face the daunting task of managing their organization’s risks effectively with a reduced risk management budget. As they work to tighten their belts, so to speak, many turn to their insurance brokers and captive managers for advice. Marsh Bermuda, for instance, is working closely with a number of its clients to examine risks their captives are writing, and helping organizations to identify potential risk management solutions that may help organisations reduce losses and consequently improve the captive’s underwriting profit. CR: What are the captive-usage trends in Bermuda? SG: Many organisations with capital sitting in their captives are examining whether or not they are using this capital effectively and if it can be used in innovative ways. For example, funding risk management may gain traction as a way for surplus capital to be put to good use without impinging on risk managers’ budgets, leaving the risk management budget to focus on other areas of risk. Companies are also beginning to examine methods of obtaining captive capital for use at the parent company level. In Bermuda, we are receiving an increasing number of inquiries regarding other methods of freeing up capital within the captive to help parent companies with their short-term cash flow needs. In the continuation of another trend, we expect to see more organisations looking to use their captives to provide insurance solutions to third parties. In many cases, underwriting third-party risks can be a profitable new revenue stream for organisations. Captives may also begin to examine their investment strategies more closely, possibly adopting a separate strategy from their parent company. Historically, many captives chose to adopt the investment strategy of their parent company. The investment industry is experiencing growth in the number of investment managers who are specialising in the investment needs of captives. Because a captive’s business is different from that of its parent company it may be worthwhile for the parent to work with an investment manager who specialises in captives to examine innovative captive investment options. CR: What regulatory developments are on the horizon? SG: As Bermuda continues to demonstrate that it is a leading insurance centre with a sound regulatory framework, many experts expect that regulations will continue to evolve to protect companies operating in Bermuda. In early 2008 the government passed the Insurance Amendment Bill 2008. The new bill made a number of changes to the Insurance Act 1978, allowing the Bermuda Monetary Authority to amend standards to enhance capital requirements and revise capital and solvency returns for insurers. The BMA also introduced new provisions for classes of insurance companies and Special Purpose Insurers. The re-categorisation of Class 3 Insurers will separate the captive and commercial insurance firms, redefining the class 3 section and forming two new sub classes namely Class 3A and Class 3. These amendments are designed to enhance Bermuda’s regulatory framework and to help ensure that it keeps up with evolving international standards while maintaining its profile as a well regulated insurance industry.
This Article first appeared in CAPTIVE REVIEW – Bermuda 2009.
About the author: Scott is a Senior Vice President at Marsh, Bermuda. His role is to develop new business for the Captive Solutions Group, including the development of new products, identification of expanded and innovative uses of captives and the incorporation of new captives. Scott is also a General Committee member of the Bermuda Under 40s Re/Insurance Group. If you have any questions, you can contact Scott at Scott.Gemmell@marsh.com or + 441 297 9749. |
