Bermuda provides a stronger regulatory environment for insurers than the Cayman Islands and is likely to benefit from its quest for Solvency II equivalence.
That is the view of Fitch Ratings senior director of insurance, Brian Schneider, who suggested that lax regulation is not attractive to companies, particularly at a time when the global trend is towards higher regulatory standards.
Earlier this year, Cayman Premier McKeeva Bush stated plainly that he wanted to lure Bermuda’s reinsurers to his jurisdiction. But this year’s three hedge fund-backed start-ups — Third Point Re, SAC Re and Pac Re — chose to launch their operations in Bermuda and that, said Mr Schneider, supports the view that the Island remains attractive to reinsurers, even as it ramps up its regulatory regime to match the Solvency II standards due to take effect in the European Union in 2014.
“On a net basis, I think Bermuda stands to gain from having greater regulation. If you look at, for example the Cayman Islands, there would be concerns for anyone starting up there that within a couple of years, you might be vulnerable because areas like the US might look to change the rules to get more taxes out of them, for example."
“As a company, you don’t want to be viewed as being in a regulatory environment that’s poorly managed. I think Bermuda’s done a good job of balancing it to keep up with the latest regulation."
Traditionally, reinsurers invest their pools of capital in securities regarded as low risk, such as sovereign bonds and investment-grade corporate bonds, while taking the big risks on the underwriting side. Hedge funds take greater risks in search of greater returns, while the new start-ups have all declared their intention to underwrite very conservatively. Mr Schneider said it remained to be seen how this approach would work out.
One of the views of Mr Schneider is that the reinsurance industry was “ripe for consolidation” and that size really does matter. “I think the smaller companies are really feeling the pressure to consolidate”, he said. Scale gives companies greater pricing power and the ability to leverage their talent and relationships, he added.
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