03 Dec A global market competing with the best in the world
David Brown, Chairman, The Argus Group, describes Bermuda as the perfect combination of life and work
When it comes to insurance and reinsurance in particular, Bermuda has an unrivalled capacity, wide choice of products, diverse range of securities, expertise, special service providers and a very astute regulator that understands the needs of the market better than any other. Can you provide your analysis on the dynamism of Bermuda’s insurance and reinsurance market to date?
Bermuda has long had a critical mass, not only measuring the count of companies, but the critical mass that we have developed in terms of the substantial workforce present on the island, the proper infrastructure to support all those businesses and the high standards of its regulation, including the focus of the regulators to keep pace with innovation. We have office space, broadband, and a massive talent pool of people already on the island, equipped with all the necessary skills. We have many service providers, accountants, and lawyers, just as we have a critical mass of insurance and reinsurance business. New companies coming into the island can plug into this already existing flow of business.
Across the world executives and government leaders are charting their road to recovery. How has the impact of the pandemic affected the stability of Bermuda’s insurance industry? What were the initial challenges faced and perhaps the new opportunities that have emerged during this time?
The Bermuda market has demonstrated its relevance and maturity during this crisis as it has during prior crises (for example, Hurricane Andrew, 9/11 and Hurricanes Katrina, Rita, and Wilma). We have seen more capital attracted to existing players and have also seen some new entrants. Our companies were well prepared to move to a remote working protocol, as they already transact business globally and many have offices around the world. In other words, I did not see any reduction in business as a result of the challenges posed by the pandemic.
Normally there would be many more face-to-face meetings with clients, brokers, and colleagues, but everyone has been in the same situation and coped well. On another note, there have been new opportunities presented by working with clients and brokers remotely. Some lines of business were previously considered less than optimal to be written in Bermuda, because they require frequent visits and extensive interaction with clients, for example to do underwriting and claims audits. These have been done very successfully on a remote basis and this may open them up more to being written in Bermuda. An example of this is casualty reinsurance.
A silver lining has been that companies have saved a lot of money with reduced travel and entertainment.
Talking about innovation taking place in the sector, there is a lot of talk around the new insurance marketplace platform, the Digital Asset Business Act and using blockchain as a catalyst for new approaches in insurance. What are you insights to this developing technological and regulatory innovation in the Bermudan and global marketplace?
We all see around the world that the business model for innovation is moving much faster in many areas and jurisdictions. In this regard, Bermuda has never stood still. As an example, the Digital Business Asset Act of 2018 is perhaps not the first, but certainly one of the earliest frameworks for recognizing and regulating businesses that hold or transact digital assets.
On another note, our FinTech sandbox is less well-known, but an extremely innovative initiative. This regulation provides for the very close supervision of businesses that are operating in an experimental and innovative manner, where there is no existing codified regulatory framework. Nonetheless, we can help them develop their businesses and figure out the regulation overtime, as they are being closely watched over their initial experimental phase.
On January 1st, the Bermuda Monetary Authority Insurance Sector Operational Cyber Risk Management Code of Conduct came into force. Cyber risks are on the rise and industries are racing to protect themselves, opening a window of opportunity for insurers. What do you see as some of the growth opportunities in the area of cyber risk for today’s insurers?
It is certainly a developing market and the growth is very rapid. There has been a concern about what is called silent cyber. Those are insurance companies who may have provided cyber cover implicitly, as the wording of the contracts was not precise enough to exclude cyber. There needs to be clarity around that area. I think that cyber is one of the risks that belong substantially in the financial markets, rather than just the insurance markets. The financial markets already have the risk. If a massive cyber event hits a company, the shareholders will suffer. Those shareholders already have that risk, they just do not necessarily recognize it. If you could separate that risk out and price it independently, those capital markets could then decide whether they want cyber risk or not. Markets are more efficient when risks are more specifically separated, so the right risk goes to the people with the right appetite. This is a great example of how slicing and dicing a risk can be good for keeping the price as efficient as possible.
Another resurgence in the market revolves around data analytics and the ability to characterize climate phenomena through algorithms used for pricing, capital allocations and risk management. What is your view on this opportunity, in the form of understanding the risk associated with global climate change emergencies?
I think that the use of data science, A.I. and algorithms for developing long-term weather models on a global scale is very promising and hopefully good for the planet. For the industry it is a bit more difficult, because all the models, no matter how precise they get, the return period for them is so long, that can be looking too far. It is critical for insurance to decide on each given year, what the right price is. Coastal losses and events are going to be an increasing factor likely. However, I think that it is going to be hard for that to affect the year-on-year pricing of that risk.
In a recent article, you highlighted the fact that a potential scale of all pandemic losses is much bigger than the capitalization of the reinsurance industry. In the US alone, business interruption claims would wipe out the balance sheet of many industry players. What are your thoughts on the initiatives currently under discussion as options for the private and public sectors to collaborate on protection from systematic risks such as pandemics?
The huge scale of the risk and the immense government financing needed indicates to me that this is too big an issue for the industry alone to solve. The solution likely lies in some combination of government funding, perhaps capital markets, and the industry participating as a partial risk taker and also an administrator of the program.
What would be your final message for our readers?
Bermuda is always going to be innovating and this is how we have managed to keep ahead from our competitors.