(Originally published in Business Bermuda Review 2013, March 2013.)As November 2012 drew to a close, catastrophe modelling firms were releasing their latest insured loss estimates from Hurricane Sandy, punctuating with an exclamation mark what has been a year of victories and challenges for the Bermuda market.Cat modeller AIR Worldwide revised upward its loss estimate for Sandy to $16 — 22 billion, while Eqecat remained at $10 — 20 billion and RMS looked set to move north to the $20 — 25 billion range. Based on the insured loss estimate development of other major US storms such as Katrina and Andrew, further upward momentum in these estimates is likely in the coming weeks.Sandy was the first major cat event in what has been a tranquil year for the worldwide catastrophe reinsurance marketplace; a marked, and welcome, contrast to 2011, which was a record year for cats.While it is still too early to tell how much of this loss will be borne by the traditional Bermuda cat re market, there is much speculation on the impact the storm will have on non-traditional Insurance Linked Securities (ILS) products.Twenty billion is a key trigger for Industry Loss Warranties (ILWs) and price volatility in cat bonds, with downward movement being the primary feature, has characterised the Swiss Re Global Cat Bond Performance Price Return Index post-Sandy.Since the introduction of its Special Purpose Insurer (SPI) category in 2009, Bermuda has vaulted into a prominent position in the ILS business, and developments in this area will undoubtedly have an impact on the Bermuda market.The victoriesLast year bore witness to a number of wins for the Bermuda insurance market. Despite increased competition from other domiciles, new registrations have kept pace with what was a very strong year for new incorporations in 2011 and with a steady surge in formations towards the end of this year, it is possible that 2012 may eclipse 2011 on that measurable.Forty-three percent of the new licenses issued in 2012 have been SPIs; further testament to Bermuda's strengthening position in the global ILS industry. While much of the ILS traffic comes from the United States, a growing number of European players looked to Bermuda to domicile their ILS structures in 2012.Another positive outcome during the year has come on the regulatory front, with the jurisdiction keeping pace with its Solvency II equivalency timetable — although the latest delays to the passage of the Omnibus II directive have prompted a re-think in Bermuda on the timing of some of its regulatory enhancements.Of particular note, is the Bermuda Monetary Authority's decision to delay or defer certain elements of the published regulations, such as enhanced capital requirements for long-term insurers and the Economic Balance Sheet, and to implement transitional provisions in respect of some of the enhancements, such as eligible capital requirements, following confirmations that Solvency II implementation would be further delayed.Notwithstanding the delay in the implementation of Solvency II, Bermuda's plan of regulatory reform appears to continue to place it in good stead as a global leader in the eyes of the Europeans, with outgoing EIOPA head Karel van Hulle recently confirming that the Island's planned “bifurcated equivalency” remained a possibility.Further penetration of new markets represents another credit to the ledger for the domicile in 2012.One market which has almost limitless promise is China and the December 2010 signing of a Tax Information Exchange Agreement (TIEA) between China and Bermuda has paved the way for the Bermudian insurers to enter that market and contribute to the management of its risks. Following the signing of the China TIEA,Bermuda-based Catlin Group entered into a partnership with the PRC state-owned reinsurer, China Reinsurance (Group) Corp (China Re). Pursuant to this partnership, Catlin manages a Lloyd's syndicate on behalf of China Re and has been granted approval to open and operate a representative office in Beijing.With China's vast opportunity, more players in the Bermuda market are certain to follow. Equally, the Latin American region continues to provide a source of new business for the jurisdiction, with the parentage of a number of the new insurers obtaining licences in Bermuda hailing from that part of the world.A TIEA with Brazil was concluded in 2012, although it has yet to be implemented, so the full extent of its benefits are not yet known. This brings to four the total number of signed TIEAs with Latin American countries.What makes Bermuda attractive to these emerging domiciles?Its reputation as a leading insurance marketplace, with a regulatory framework which remains at the vanguard of international standards yet at the same time allows its registrants to conduct their business with a minimum of red tape and unparalleled access to regulatory decision makers which creates a very positive environment for business.Another major development in the Bermuda market in 2012 is the growing phenomenon of hedge fund-owned insurance companies.Last year saw the establishment of Third Point Re, SAC Re and PaC Re and a new trend in the Bermuda market was clearly established, bringing almost $1.8 billion in new capacity into the market. This development is simply the latest step in the evolution of hedge fund involvement in the Bermuda market, from participation in earlier start ups, through side cars, to fully-fledged, highly capitalised Class 3B or 4 reinsurers.For the hedge funds and their investors, the addition of a reinsurance company aids in the diversification of the risk in the hedge funds portfolio. The reinsurance company will respond to risk events that are largely uncorrelated to the investment risks of the financial assets in the portfolio, providing a useful hedge and enhancing the return potential of the fund.The challengesThe protracted malaise of the international economic system has had an impact on results as Bermuda market insurers dealt with the aftermath of the record 2011 cat claims in a low-interest environment for investments.Although there was some upward movement in pricing for certain lines, the overall pricing environment remained soft throughout the year. It is too early to tell whether Sandy will be a game changing event in terms of pricing.Keeping pace with the global regulatory developments will always be a challenge for Bermuda's regulators; although to date they have demonstrated that they have been equal to that challenge.Although the Solvency II drama dominated the headlines in 2012, developments continue on other fronts globally: the Solvency Modernisation Initiative in the United States and the IAIS's evolving Core Principles on Insurance being two in particular which are relevant to Bermuda market players.The threat of taxes emanating from the US is a perennial challenge to the Bermuda insurance market and 2012 proved no exception on that front, although, as has been the case in each year for at least the last 10, threatened tax reform on insurance has yet to materialise.The Neal-Menendez Bill (HR 3157 and S 1693) attempts to limit the tax deduction that a US based insurance company can claim for reinsurance premiums paid to a foreign affiliate.A similar proposal is contained in the US Federal Budget for 2013. The counterpoint to this initiative — ably made by J David Cummins and Association of Bermuda Insurers and Reinsurers (ABIR) head Brad Kading — is that foreign reinsurers in general and the Bermuda market in particular, has been the principal source of capital and relief to families and businesses afflicted by natural disasters in the United States.The Bermuda market provides financial support to disaster struck areas of the US efficiently and cost-effectively; and has shown amazing resiliency such that it can be back to capacity and ready for the next disaster within months.Increasing the tax burden on this market by this punitive measure will only hurt the average American who is impacted by natural disasters by driving up the cost and reducing the availability of reinsurance which in turn impacts the front-line cost of insurance.This takes us full circle back to Hurricane Sandy, which decimated the New York metropolitan area days after the publication of the New York Times article by Cummins and Kading. As loss payments start to flow in the aftermath of that storm, it will serve as a poignant reminder of the fundamental purpose of the Bermuda market and has given meaning to all of the aforementioned activity.This market exists to serve a vital role in the global community — to provide financial relief to the dispossessed to help people cope and rebuild from exposure to the vagaries of nature.Timothy Faries is partner and insurance group team leader for law firm Appleby.