Global Policy Forum

By Joseph B. Treaster

Amilton, Bermuda -- The construction project in the middle of town tells the tale of how things have been going lately amid the pastel bungalows and perpetual spring that have long defined this island. The grand old Bermudiana Hotel and its luxuriant gardens have been leveled; in their place are rising two big insurance buildings.

With relentless competition and changing tastes, Bermuda's tourist business has been fading. But with no corporate taxes and light regulation, the island has quietly developed a booming insurance business, making Bermuda the third leg -- with New York and London -- in the world's central insurance triangle.

In the low-rising, vaguely dated village of Hamilton, underwriters, actuaries and brokers are the new princes. The resident lawyers and accountants depend heavily on insurance business, and the construction trades have seldom been busier. Not far from the Bermudiana site, an even bigger block of insurance offices is just being completed. At night, tables at Little Venice and the more expensive Cafe Lido are filled with insurance executives and their clients. "We'd be lost without the insurance people," said Tullio Lombardi, an assistant manager at the beachfront Cafe Lido. And a lot of insurance people would be lost without Bermuda.

Much as Liberia and Panama have provided flags of convenience for the world's maritime fleets, Bermuda has blossomed as a convenient extension of the U.S. insurance industry. A self-governing British colony, it has generally managed to steer clear of money laundering, drug smuggling and most of the fly-by-night financial scams that have tarnished other so-called tax havens. And it has attracted a cadre of insurance technicians from the United States and Europe that, as government business recruiters like to point out, adds to the ease of setting up shop here.

Bermuda is the land of megadeals, where corporate policies are written that often kick in only after losses hit more than $100 million. For the buyers and sellers in this highflying world, Bermuda's oversight is a model of restraint. Here, the issue is financial strength. The details of day-to-day business are between the insurers and their customers.

With that philosophy, Bermuda has become a place where new twists in coverage can be worked out in a few days -- or at worst -- a few weeks, rather than the months, if not years, needed in the United States. Bermuda's laissez-faire supervision stands in sharp contrast to the thickets of regulation that have grown up in all 50 states with the goal -- rarely fully realized -- of protecting the smallest policyholder rather than oiling the wheels of commerce.

Bermuda's overall success has recently inspired regulators in the United States to begin easing up. Half a dozen states have agreed to let corporate buyers and sellers negotiate the terms and prices of high-level coverage just as all coverage is handled here. And similar legislation is being considered in New York and a dozen other states.

The regulatory and tax advantages of Bermuda -- and just an hour and a half by air from New York -- made it a natural for solving the industry's problems. When heavy losses caused even Lloyd's of London to back away from offering high-ticket, high-risk coverage against product liability lawsuits and the ravages of hurricanes and earthquakes, Americans with deep pockets and a sense of opportunity turned to Bermuda to set up companies that would consider almost any proposition.

Bermuda's main customers are America's corporate giants, whose transactions here mean less money for insurers in the United States. Yet the big U.S. insurers are not complaining. They helped create Bermuda's insurance business. Some have profited by setting up their own subsidiaries here; many others have become buyers of catastrophe reinsurance, which at first was available almost nowhere else and now helps them diversify.

Still others have been delighted to have Bermuda sharing the market for stratospheric coverages so they are not faced with either taking on more risk than they can comfortably handle or disappointing corporate clients.

So, out of self-interest, U.S. insurers have quietly accepted the rise of Bermuda. "The other insurers need Bermuda as much as Bermuda needs them," said Sharda Cherwoo, an insurance specialist at Ernest & Young, the international accounting firm.

Bermudian companies pioneered financial coverage that pays off on fluctuations of foreign currency rates and commodities prices, often packaged with protection against, say, plant fires and lawsuits. And the Bermudian titans -- Ace Ltd. and X.L. Capital Ltd. -- have begun extending their reach. They have turned the tables on their elders, buying up older -- and sometimes bigger -- companies in the United States and prowling among the Lloyd's syndicates that once tried to use their influence to crush the island upstarts.

In the slimmed-down, customized world of Bermudian insurance, there are fewer protections for corporate customers. For example, most Bermudian policies require that disputes be worked out in binding arbitration, rather than in the courts. Also in the United States, insurers are required to contribute to a so-called guarantee fund in each state that provides money to pay claims if an insurance company collapses. In Bermuda, there is no guarantee fund.

But Bermuda has no shortage of customers. For many of its clients, the ability to work out new coverage quickly to solve an immediate insurance problem and to take on enormous risk outweighs concern about a forum for resolving disputes that may never materialize.

For big corporations with policies in the tens of millions of dollars, U.S. guarantee funds are of little value anyway because they are usually worth only a few hundred thousand dollars, little help if an insurance company fails to pay off a multimillion-dollar loss.

Moreover, oversight does not end with the regulators. Many of the Bermudian companies are publicly traded in the United States and subject to the reporting requirements of the stock exchanges and of the Securities and Exchange Commission. The rating agencies periodically examine the books of all major insurers, including the Bermudians, and publish their findings on financial strength, which provides a powerful measure of their ability to pay claims. "A company with a low rating is just not going to get any business," said Barbara Stewart, an insurance consultant in Atlanta.

The foundations for Bermuda's insurance industry were laid shortly after World War II. That was when U.S. corporations realized they could save money with a paper device known as a captive insurance company, which enables a corporation to effectively sell itself insurance and deduct the premiums from its taxable income. And for tax and regulatory reasons as well as Bermuda's reputation for probity, many U.S. corporations began registering their captives in Bermuda. Today, there are roughly 1,400 captives in Bermuda, more than anywhere else in the world.

But it took a few decades before the first big mainstream Bermudian insurance companies were created. They began in the mid-1980s with New York money, knowledge and technical skill. When traditional insurers cut back on high-end coverage, Robert Clements, a senior executive at Marsh & McLennan Cos., the world's largest insurance broker, persuaded IBM, Ford Motor, Royal Dutch/Shell and 31 other corporations to go offshore to Bermuda and start their own insurance companies. That was how Ace was started. Six months later, Clements brought together other corporations to form Exel Ltd., now XL Capital. It is Ace and XL that are building the new offices that are going up on the grounds of the Bermudiana Hotel.

As a prerequisite for the new companies, Clement roughed out a new kind of liability policy that carved a middle path between the most restrictive and most liberal policies.

In the early 1990s, big hurricane and earthquake losses convinced major insurance companies that they should be buying a lot more reinsurance. But traditional reinsurers, which provide back-up coverage to the front-line insurers, did not want to put more chips into a game that was looking increasingly dangerous. So Clements dusted off his old blueprints and started Midocean Reinsurance Ltd. to sell nothing but coverage for other insurers against the worst calamities. Eventually, eight catastrophe reinsurance companies were created.

Others' disasters were a timely salve for Bermuda's economy. For decades, Bermuda has been like a big country club for the East Coast golf and tennis set. It also has been a favorite of honeymooners.

But Bermuda's popularity is waning. Visitors in recent years have complained that the island is horribly expensive -- a couple of sandwiches and drinks can easily run $40. While peace and quiet were once big selling points for Bermuda, visitors today often complaint that there is not much to do.

The economic balance tipped in favor of insurance and other international business three years ago and since then the gap has been widening. In the last fiscal year, insurance and other international businesses pumped $757.6 million into Bermuda compared with $472.3 million from tourism.

Partly because of the stagnation of tourism, Bermudians last fall voted out the United Bermuda Party, which governed for 35 years. The new prime minister, Jennifer Smith of the Progressive Labor Party, is in a delicate political position. She must encourage the growth of insurance, but she must not be seen to be favoring it over tourism -- even though there is some overlap -- because even now, tourism provides more jobs. By her count 2,400 people work in insurance and nearly 6,000 have jobs in hotels, restaurants and other businesses in the tourist trade.

As practiced in Bermuda, insurance is a fast-paced business. The companies have small staffs. There is a lot of give and take and a blurring of ranks that often make the companies seem more like research centers than like hierarchical insurance concerns. Ties, and sometimes even shoes, are optional at some companies.

While the insurers would like to do more local hiring, most of their highest-paying jobs go to fairly young expatriates, attracted by money, a balmy climate and the opportunity to work on big, important transactions. After work on Fridays, underwriters, actuaries and brokers crowd into the Robin Hood, a pub on Richmond Road, to let off steam. They bring their energy to what was once a pretty sleepy place.

"They've got a certain amount of sassiness and arrogance coupled with real entrepreneurial spirit," said Bill McGannon, who, for years, was in charge of the insurance budget of the Nova Chemical Corporation in western Canada. "They don't come up with a lot of reasons they can't give you what you need. They want to do a deal."