Stepping into a brave new fintech world
We have long been hearing that Bermuda needs to diversify its economy. The reasons are straightforward enough. Bob Richards, the former finance minister put it well in an interview with The Royal Gazette in 2010.
“Take a B52, a bomber that’s designed to fly into high-risk situations,” Mr Richards said. “It has eight engines, so if one or two or even three fail, the plane can still fly. But in single-engine Bermuda, we have to avoid the risks that larger countries take because if our one engine stalls, we’re going down. That single engine is international business.”
The need to put our eggs in more than one basket is becoming more evident by the month with the changing landscape of the island’s powerhouse insurance industry.
In years past, when destructive catastrophes racked up enormous insurance claims, the result would be a scramble for capital to replace the billions lost, with rates for reinsurance bouncing sharply higher. The higher rates would attract new companies and the best place for them to get up and running quickly to take advantage of the hard market was, of course, Bermuda.
It happened repeatedly, particularly after Hurricane Andrew in 1992, the 9/11 terrorist attacks in 2001 and hurricanes Katrina, Rita and Wilma in 2005. Each time, a fair chunk of the industry’s capital replenishment came in the form of Bermuda start-ups, bringing with them job opportunities and increased demand for all manner of local services, from schools and housing to restaurants and legal practices.
But the days when we could rely on the peaks and troughs of the reinsurance cycle to provide the island’s economy with a periodic shot in the arm seem to be behind us. If there was any doubt about this fundamental change in the industry’s dynamics, this year has cleared it up. After a record $135 billion in insured catastrophe losses last year, there is no sign of a “Class of 2018” wave of new companies on the island. And brokers have reported that the consequent increase in rates has been much less dramatic and sustained than many carriers had hoped for.
While much of the industry’s replacement capital has come to Bermuda, it’s largely arrived in the form of insurance-linked securities, which, while generating work on the island and supporting existing jobs, does not create the new jobs of the traditional reinsurance start-ups of years gone by.
Reinsurers’ profits have been squeezed by declining insurance prices in many lines — exacerbated by competition from ILS — and low interest rates that have limited the returns companies can earn from their vast pools of capital. Consolidation has been an inevitable consequence of this environment, with AIG’s proposed acquisition of Validus and Axa’s planned takeover of XL Catlin being two outstanding examples this year. Mergers usually result in job cuts as companies streamline combined operations in the interests of efficiency.
Add in the impact of US tax reform, which has somewhat eroded the island’s tax advantages over US rivals, and one might reasonably deduce that the payroll of the international insurance industry in Bermuda would be more likely to contract than expand in the coming years.
While the island appears likely to remain an insurance hub, thanks to its accumulated depth of expertise and internationally respected regulation, it may have passed its heyday in terms of the jobs it provides on the island.
It is clear that Bermuda needs to respond and adapt its economy to meet the evolving needs of a fast-changing world. With this in mind, the events of recent days have been encouraging.
Bermuda’s strategy to stake its claim to a share of the emerging financial technology, or fintech, industry, has become much clearer with the publication of a consultation paper by the Bermuda Monetary Authority on the Virtual Currency Business Act. The 150-page document lays out rules designed to welcome those willing to do business transparently and to deter those looking for a haven to hide illicit activity.
As the BMA’s Kevin Anderson told a packed business audience at a fintech seminar last week: “It’s been a challenge for us, because normally we look at what other jurisdictions are doing, but in this case there are no examples.”
In effect, the island is setting out to differentiate itself as a pioneer in terms of establishing a legal and regulatory framework to accommodate crypto-businesses. Overregulation is a frequent complaint of business people, so creating a set of rules for an industry that has flourished in a largely unregulated corner of the financial world may seem odd.
However, it could prove to be a smart move. The bigger cryptocurrencies get, and the more significant to economic stability, the more certain it is that regulation will catch up with them. When that happens, Bermuda could be a step ahead of the pack.
Also, Bermuda has a recent example of how adding to regulatory requirements was good for business. When the island beefed up its insurance rules to earn equivalence with the European Union’s Solvency II insurance rules, some offshore rivals tried to attract business from the island arguing that they offered lighter-touch regulation.
Bermuda has had the last laugh, as its insurers can access the EU market on a level playing field with EU rivals and equivalence is seen as a feather in the island’s cap. The move was also on the right side of an international desire for higher standards of supervision for a financial-services industry that people stopped trusting after the crisis of 2008.
Besides, if Bermuda wants to participate in crypto-business, a regulated environment is the only realistic choice. Staking its claim as an unregulated Wild West frontier of a “buyer beware” industry with no rules could have done real damage to the island that has honed its reputation as a “blue-chip” offshore jurisdiction.
The roller-coaster valuation of cryptocurrencies has been a real distraction from the immense potential of blockchain. Experts see new branches of established industries forming, like insurtech, regtech, healthtech and even oceantech. No one knows how it will all pan out, but the sense at last week’s seminar was that big changes are coming fast.
The Bermuda Government is taking a sensible first step into this brave new world and it is in all of our interests that they succeed in attaching an extra engine or two to our wings.
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