O’Hara expects insurance hard market to persist
Brian O’Hara sees no signs of an end to the hard insurance market that has inspired a slew of start-ups in Bermuda this year.
The Bermuda re/insurance industry veteran said the drivers of the hard market were issues for which there was no quick fix and so he expected re/insurance rates to continue to rise.
In a wide-ranging interview, Mr O’Hara, a founding executive of XL Capital who this year published a book, It’s Not The Score, It’s The Trip, also spoke about how XL might never have happened had a deal involving Warren Buffett not fallen through and he revealed that he suggested to a former finance minister that Bermuda should levy an income tax.
On the hard insurance market, Mr O’Hara, who was XL’s chief executive officer for 14 years, said: “We haven’t seen a dynamic like this in 20 years, since after 9/11, when it was a combination of bad underwriting results, like we have right now, and the shock of the terrorist attack.
“It’s the same kind of thing where we have this liability explosion at the same time as the pandemic.
“The pandemic is not settled. There are tons of lawsuits trying to get business interruption insurance. If the courts ruled that all business interruption had to be covered then the industry would be bankrupt again, just like in 1985.”
It was in the mid-1980s that XL was born to meet a huge demand for liability insurance. Then, as now said Mr O’Hara, the American courts tended to be “plaintiff-friendly” in civil cases, with insurers footing much of the bill.
“In the last eight to ten years, courts in the US have really gone left and loose,” Mr O’Hara said. “The casualty losses in the market are enormous and they haven’t even come close to being published yet.”
One example was the opioid crisis, he said. While the manufacturers of the addictive painkillers tended not to be large companies and were not heavily insured, lawsuits had gone after distributors like Walmart and CVS, who had substantial coverage.
“They have hundreds of millions of dollars of insurance and they’re all getting cleaned out,” he said. “It’s hitting the market hugely.”
The scope of directors’ and officers’ insurance, first envisaged as coverage against legal action taken by unhappy shareholders, had broadened. Now “almost anybody along the ESG [environmental, social and governance] line” is suing with the aim of winning payouts from D&O coverage, Mr O’Hara said.
He added: “We have product that has been expanded way beyond the foreseeable risks that were originally being underwritten. That’s going to take a while to go away and that’s why I don’t think there’s any quick fix here.”
Another driver of the hard market is the lack of income that insurers can generate from investing their huge pools of capital in the prolonged ultralow interest-rate era.
“Back when I was working, half of my income was investment income,” Mr O’Hara said. “We had top-grade bonds with an 8 per cent annual return. Today, you can’t make any investment income in the insurance business at the same time as you’re haemorrhaging losses. All the forces that are driving the hard market seem to be very sustainable.”
In his book, Mr O’Hara tells the story of how XL was formed, along with Ace, in the mid-1980s, a period that helped Bermuda leap from being a captive insurance domicile to a true global re/insurance marketplace.
One story left out of the book showed how that pivotal time in Bermuda’s history could have turned out very differently. It involved Maurice “Hank” Greenberg, then the CEO of American International Group, and legendary investor Warren Buffett, founder and chairman of Berkshire Hathaway, almost creating their own solution to the excess liability insurance crisis.
Mr O’Hara recalled: “Hank saw what happened with Ace and he saw that Marsh and JP Morgan were building XL. He was out to stop it dead and he was willing to do anything.”
The pair struck a 50-50 deal and Mr Greenberg travelled to Nebraska to shake on it.
As Mr O’Hara tells it: “Hank, being Hank, couldn’t help himself when they got down to meeting in Omaha for the final agreement.
“He said, ‘we’re going to be using AIG paper, we going to be doing this and that, I need 60-40’. And Buffet said, ‘no deal, we said 50-50’. The deal fell apart and thank God, because we would have been dead.
“If they had got that thing together, XL probably never would have happened.”
XL grew strongly under Mr O’Hara’s leadership and through a series of acquisitions, it became a truly global insurer, helping Bermuda progress into a truly global re/insurance hub.
Mr O’Hara helped to found the Association of Bermuda Insurers and Reinsurers and served as chairman of the industry organisation in 2004.
“One thing we recognised early as a group was the necessity to have a regulator that could get international stature and recognition,” he said.
“If we weren’t going to do that then we would not survive, because by that time we were getting so successful that everybody hated us and wanted to put us out of business, especially the Europeans, particularly the French.
“It’s ironic that the French own XL now,” he added referring to Axa’s takeover of XL Group in 2018.
“That [the strengthening of financial-services regulator the Bermuda Monetary Authority] is the best thing we ever did and it has paid off huge dividends ever since, especially now. Even though some things have changed there’s still nowhere better to build a start-up than Bermuda.”
The island has the best regulatory regime that allows the fastest speed to market for a new reinsurer, he said. Recent US tax law tax changes have reduced the tax benefit of basing in Bermuda, however, and meant that fewer staff needed to be here than previously.
“Bermuda is still the best place to form a holding company and for reinsurance,” Mr O’Hara said. “Bermudian-based companies can set up US operations, which pay the tax on their earnings before they reinsure it back to Bermuda. This means that a whole layer of underwriting management isn’t needed in Bermuda any more.
“It actually makes it easier to start a business here and do business in the United States – you just don’t have a tax advantage. But the tax advantage isn’t that big a deal. It’s all about regulation. With interest rates at zero, nobody can make that much money from investment income.”
Threats continue to emerge from overseas as rich economies seek to maximise their tax take and minimise the benefits for companies of basing themselves in jurisdictions like Bermuda that do not tax corporate profits. The Organisation for Economic Cooperation and Development’s proposal for a global minimum tax rate is the latest big idea.
Some six years ago, Mr O’Hara recalled suggesting to then finance minister Bob Richards that a change to the island’s tax system could be beneficial.
Mr O’Hara said: “US employees pay full US income tax and payroll tax in Bermuda, so we get double-taxed to death. That’s why a lot of companies moved a few years ago. But if we called it income tax instead of payroll tax, we could deduct that from our US income tax. And Bermuda would have an income tax and get everybody off our back. Just a little, measly 4 per cent would get us out of that ‘no-tax jurisdiction’ bucket.”
Mr Richards reminded Mr O’Hara that under the Exempt Undertakings Act 1976, Bermuda had guaranteed to bring in no new taxes on income or capital gains through March 2035.
“I don’t see any reason why, if we all put our shoulders to the wheel, and tried to convince everybody, that we couldn’t get a change to the law that said it was 4 per cent and couldn’t be moved from that,” Mr O’Hara said. “I think that would have been a great win-win. Maybe we’re going to have to do something like that, I don’t know.”
Mr O’Hara still has many business and philanthropic interests. For example, he serves as a director of Envelop Risk, a Bermudian insurtech firm with expertise in machine learning.
He said artificial intelligence will change the insurance industry, but the human element and the “gut” instinct that good underwriters possess will continue to have value.
“It will streamline the process, which will require fewer underwriters, but better underwriters,” Mr O’Hara said.
“The actuarial profession is not going to go away. Actuaries are the best people to work with AI. There won’t be as many jobs, but they will be highly paid. So that still augurs well for Bermuda.”