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Lloyd’s and Bermuda: symbiotic re/insurance markets

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Lloyd's of London: The huge insurance market has a mutually beneficial working relationship with Bermuda

Coffee houses were an important part of commercial London in the 1700s, and Lloyd’s Coffee House was known as a place to talk about shipping.

It is difficult to say whether Bermuda would have come up in discussions in Lloyd’s back then, but if it did, it would have been as a navigational obstacle to commercial trade routes rather than as an insurance market in its own right.

That small coffee shop transformed over time to a place where ships and cargo were insured, and ultimately into one of the most renowned insurance markets in the world — Lloyd’s of London.

Lloyd’s is overseen and promoted by the Corporation of Lloyd’s, which is responsible for managing international licences, conducting regulatory reporting, and determining the capital levels that members must provide to support their underwriting book.

Business is delivered by brokers, conducted through syndicates — and the finished products, insurance and reinsurance, are provided to policyholders.

Syndicates are supported by managing agents, entities that provide day-to-day operational services. Syndicates frequently write business through coverholders, entities that underwrite risks on behalf of a given syndicate or syndicates.

One of the most famous losses at Lloyd’s involved the Titanic, but often it is the unique policies for which Lloyd’s receives media attention. For example, and according to various sources, Lloyd’s insures National Football League player Troy Polamalu’s hair, and rocker Keith Richards’ fingers.

The Bermuda market may not take on as many bespoke risks as its London counterpart, but it is considered by many to be the world leader in natural catastrophe reinsurance.

According to the Association of Bermuda Insurers and Reinsurers, and by way of example, Bermuda re/insurers paid out US $22 billion to rebuild the Gulf and Florida coasts after the 2004/5 hurricane seasons, and collectively Bermuda re/insurers provide more than 60 per cent of hurricane reinsurance in Florida and Texas, and up to one-third of US crop reinsurance in key states.

The Bermuda insurance market and Lloyd’s intersect on many levels: as competitors, offering capacity and underwriting expertise to policyholders around the world; as counterparties, reinsuring risk from one another; and as investors as more fully discussed below.

Bermuda re/insurers have been consistently snapping up Lloyd’s platforms since the mid-1990s when Ace and Mid Ocean Ltd, among others, acquired interests in various Lloyd’s entities (previously there was a prohibition on corporate ownership).

At present there is an impressive percentage of Bermuda re/insurers with Lloyd’s platforms — Ace, XL, RenaissanceRe — and, most recently, Hamilton Re to name but a few.

By acquiring a Lloyd’s platform, Bermuda re/insurers are able to:

• Diversify into additional lines of business.

• Diversify with respect to geographic scope of business.

• Leverage the stellar Lloyd’s ratings across the 200 or so nations and territories where Lloyd’s is licensed.

• Access the concentration of risk-related expertise in the London market — for example, the experienced network of brokers.

Frequently the investment interest operates in the other direction — UK entities with a Lloyd’s platform take an interest in, or form, a Bermuda re/insurance company. Amlin plc and Hiscox plc are two such examples.

UK entities with Lloyd’s platforms can operate in Bermuda as stand-alone re/insurers seeking third party business worldwide, and commonly in North America. Alternatively, they can underwrite related risks of UK entities, such as UK coverholders.

Another model involves UK entities with Lloyd’s platforms incorporating Bermuda exempted companies that are then licensed (under the Insurance Act 1978, as amended) as coverholder/agents. These entities are then used to underwrite re/insurance risks on behalf of respective Lloyd’s syndicates and/or their corresponding UK coverholders — essentially underwriting as a foreign arm of an existing Lloyd’s platform.

The above configurations provide the UK entities with an avenue for diversification as they are able to seek risks and obtain business from another insurance market that is not only geographically well-positioned, but also well-regulated and highly-skilled.

Bermuda also plays host to rather more unique risk vehicles involving both Lloyd’s and the Bermuda market. Bermuda insurance companies have been set up to provide fully collateralised reinsurance for Lloyd’s syndicates, where the collateral is obtained from regions that have little or no exposure to the types of risks covered.

Ideally the two markets will continue to develop in a symbiotic way, where policyholders, insurance professionals, service providers, and investors all benefit.

Lawyer Matthew Carr is an Associate and a member of the Corporate and Commercial Practice Group at Appleby. A copy of this column can be found on the Appleby website at www.applebyglobal.com.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

Matthew Carr