Tough year in store for insurers
International business faces a challenging year ahead in an increasingly soft market with downward pressure on insurance rates and a tough investment environment offering minimal returns.That is according to industry experts who said that a number of factors ranging from an excess of capital and a rise in activity in the alternate risk and insurance-linked securities sector to the implementation of new regulations, including Solvency II, would have a big impact on the future of Bermuda’s economy.But they said that there were some positives on the horizon with new opportunities being presented as the global economic outlook improves and the markets pick up again.Richard Lightowler, partner at KPMG, who specialises in insurance, said that insurers were being squeezed from two sides due to the pressure on rates and an unattractive investment environment.Mr Lightowler said that added to this was the increased competition as a result of excess capital in the market and achieving Solvency II equivalence with the assessment due to be carried out in the second half of 2011, which he viewed as a positive.“It’s looking like it’s going to be a tough year,” he said. “The most important thing is to focus on coming out of this soft market in good shape when the market does turn and insurance rates pick up again.”On the captive side, he admitted that there had not been many new formations, which was to be expected in a soft market, but a number of new avenues had opened up through the signing of tax information exchange agreements (TIEAs) with the likes of Canada and tapping into the Latin American market for business.Craig Bridgewater, lead partner in investment and banking, said that there was a large amount of pending regulation, including the alternative investments fund directive in the European Union (EU), the Dodd-Frank Act in the US, Basle III and the UK Financial Services Authority’s regulation of bankers’ remuneration and bonuses, but that Bermuda was well placed on most fronts.Mr Bridgewater said that the Island was also backed up by a strong anti-money laundering regime and would be looking to capitalise on the rise in the markets year to date, growth in the US economy and new start-ups, with new funds set up and private equity deals being done, but the industry as a whole still had work to do in order to attract the business.On the issue of work permit term limits, he said that Government needed to be more creative about how they were applied and look at what their competitors were doing to attract talent to their shores, through bringing in wealthy individuals with the potential to create jobs.He added that while a number of companies including HSBC, Butterfield Fulcrum and Citigroup had moved their back office operations to low cost jurisdictions, Bermuda was still competitive compared to places such as the Cayman Islands.Mr Lightowler said that while term limits had been an issue two or three years ago, they were not a major consideration for employers at present, while acknowledging that Government had to strike a balance between protecting the national population and driving economic growth.He said global businesses in Bermuda were placing their staff where they would be best utilised and that may not necessarily be on the Island.Mr Lightowler added that it was also important for Bermuda to improve its education system in order to boost its own talent pool to meet the growing needs of international business in the future.Scott Watson-Brown, partner, asset management, at PricewaterhouseCoopers (PwC), said that there had been a shift in investors’ priorities from looking for a return on their investments to better understanding the risks involved and having transparency.Mr Watson-Brown also noticed a rise in the number of individuals in emerging markets seeking investment opportunities, which in turn has lead to a growth in demand for hedge fund and private equity investments and companies were responding with the launch of more niche products and strategies, and in Bermuda’s case, the push for Islamic finance and insurance-linked securities.Caroline Foulger, partner and re/insurance leader at PwC, said that as the BRIC (Brazil, Russia, India and China) economies had expanded, their businesses needed to insure themselves against greater risks and as a result companies from Bermuda were opening up offices there to access that market. However, she said that as one of the few areas of economic growth, a number of global re/insurers were competing for the business.Ms Foulger said that one of the main reasons behind the success of Bermuda as a jurisdiction had been the hard work and direction of Government, the regulators and the sector as a whole and there had been a concerted effort between the public and private sector, with the Ministry of Finance promoting the Island as a domicile of choice and the Bermuda Monetary Authority working closely with industry to achieve Solvency II equivalence.Mr Watson-Brown said it was important to look at the factors which made Bermuda attractive as a jurisdiction to new start-ups or existing businesses including tackling the relatively new issue of escalating crime and violence in order to make it a safe and secure place to live and work, maintaining its position on the Organisation for Economic Co-ordination and Development’s (OECD) ‘white list’ through the signing of TIEAs, ensuring it remains a strong regulatory environment and has the infrastructure in place to support them.He said that the new administration had shown it was serious about international business with the formation of a Ministry of Business Development and Tourism.“We need to fight to maintain whatever advantages we have now because these advantages are getting narrower and as new opportunities arise the Island needs to ensure that we get solutions quickly to the market,” he said.Ms Foulger agreed that it was important to address concerns over the jurisdiction’s future by publicising the progress that had been made in fighting gun crime in what had previously been an almost trouble-free society.“Looking forward, the most important challenge is maintaining Bermuda’s advantages while building on them and moving to the future,” she said.“There are two key advantages we have as a jurisdiction - firstly speed to market and the ability to respond quickly to a market opportunity, and secondly the very significant talent pool we have here of both industry professionals such as underwriters and actuaries and the professional services firms who support and enable them.“We have gone through some challenging times and will continue to do so, but with everyone in Bermuda working together towards the same objective, we can weather this storm.”Ms Foulger said that despite companies looking at reducing their overheads, there were a number of opportunities, particularly in investment in technology, to improve operational efficiencies, and when new capital entered the sector in the future it would more likely be in the form of additions to existing business lines such as sidecars rather than new start-ups being launched.She added that there were also indications that businesses were becoming more creative in managing their talent pool and cost pressures by considering sabbaticals, job-share or work reduced hours for their employees to help maintain a better work/life balance, while some found roles for valued staff who couldn’t necessarily relocate in other parts of the organisation.Mr Watson-Brown said that the issue of term limits was a concern among the industry but while companies were looking at outsourcing their back office operations to low-cost jurisdictions, for example Halifax in Nova Scotia, it was still crucial for them to maintain their front desk presence on the Island.He said that Bermuda compared favourably with the likes of Switzerland and, until recently, Ireland in terms of cost of doing business and the jurisdiction’s ability to attract and service small and specialist operations, particularly in the areas of fund and private equity administration and wealth management catering to the requirements of high net worth individuals, was key to its future success.Acknowledging that the recent number of job losses and companies leaving the Island over the past two years had caused a degree of uncertainty among the community, Mr Watson-Brown said it was paramount to stimulate growth in the sector and its service providers by bringing in the right talent and training up Bermudians with the help of Government-led incentives.Ms Foulger said that Bermuda had done a excellent job on the reputational front as a jurisdiction, while the US tax threat through the Neal Bill had taken a backseat to more important issues for the US government. However she added that it was still a factor to bear in mind.She said that there was a positive mood about the new administration reflected in the popularity ratings of Premier and Finance Minister Paula Cox and her knowledge and experience of international business, but there remained some tough decisions to be made, not least in this month’s much anticipated Budget Statement.Reflecting that while its competitors had all stepped up their game in a bid to replicate what Bermuda had achieved, the Island needed to pull together to ensure it maintained its competitive edge.