Bermuda requests buyers support as ABIR states case for equivalence in Brussels

A Bermuda delegation was in Brussels this week to state the Island’s case for equivalent status with representatives of the European Commission and Parliament.

The delegation also met FERMA as part of an effort to gain support from European insurance and reinsurance buyers. The Bermudians told Commercial Risk Europe that such support could be critical to help convince the Commission that the market is a fundamental source of risk capacity and should not be disadvantaged.

The delegation then headed on to Montreux in Switzerland for a meeting with the Geneva Association to further cement its relationship with the international group and others such as the Comité Européen Des Assurances (CEA) in its ongoing effort to gain early recognition.

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Under Solvency II, only those companies that are based in countries considered to have equivalent supervisory regimes to Solvency II will be granted the ability to continue underwriting risks directly or via subsidiaries without extra capital charges and management requirements.

Experts agree that those companies based in regimes that are deemed not to be equivalent are likely to face extra capital charges, with limited use of the group supervisory system thus raising frictional costs and reduced credit for reinsurance.

It is even thought that some European insurance interests and supervisors may campaign for collateral to be placed for risks covered by companies based in non-equivalent territories, just as the U.S. still does for so-called alien reinsurers.

Bermuda companies provide European corporate insurance buyers and reinsurance buyers with significant and rising coverage. The Bermudians say that it is important that their campaign gains support among the buying community because if Bermuda did not gain equivalent status then capacity would be reduced and prices rise.

“If Europe refused equivalence then we would simply have to do what is required over here with all the costs that would be incurred and that would, of course, be passed on to the customers. Our goal is to maintain a level of capital efficiency. The greater the political interference, the higher the cost is to consumers. It is as simple as that,” Michael Butt, Founding Chairman of the Association of Bermuda Insurers and Reinsurers and Chairman of AXIS Capital Holdings, told CRE yesterday in Brussels.

“We value the opinions of the corporate buyers, especially the large corporate buyers that have large exposures. They need plenty of capacity that is offered on reasonable terms and at a good price. They want to have very competitive insurers and reinsurers. This is why we are talking to FERMA, AMICE [the Association of Mutual Insurers and Insurance Co-operatives] and the CEA because we need their support,” added Bradley Kading, President and Executive Director of ABIR, shortly after a meeting with Peter Den Dekker, President of FERMA.

ABIR has 23 members that wrote gross premiums of €42bn in 2009 and boasted a surplus of €62bn. Mr. Kading explained that 58% of global reinsurance was provided by companies based outside of the European Economic Area (EEA) last year with 15% of that provided by Bermuda companies.

The association estimates that some 27% of broker-placed European-sourced reinsurance and 30% of Lloyd’s of London’s 2008 premium is ceded to Bermuda reinsurers and their European Union subsidiaries. Based on 2006 figures provided by Aon, ABIR said that 9% of broker-placed European reinsurance is ceded directly to Bermuda reinsurers and this would be the most affected by a lack of equivalence.

Mr. Kading said that, based on early estimates, Bermuda insurers and reinsurers hold about 32% of the publicly disclosed losses of about $300m for windstorm Xynthia that ravaged France, Spain, Portugal, Germany and the Benelux earlier this year. The total Xynthia loss is estimated at about $1.5bn.

He also said that non-E.U. insurers hold about 55% of the roughly $1bn loss from the Air France disaster last year. Of this theoretical total, Bermuda companies are thought to hold about $222m compared with $445.5m by European companies and $212m by companies based in the United States.

The Buncefield oil storage terminal fire in the United Kingdom in 2005 is estimated to have caused insured liabilities of about $850m based on 2,700 filed claims. According to ABIR, some 85% of the fire and explosion liabilities were picked up by non-European insurers of which Bermuda carried 62%.

ABIR has been lobbying its case in Europe and Brussels in particular for the last four years. The effort has been stepped up because the deadline looms for Solvency II and the recent change of administration at the European Commission and elections at the Parliament has brought in a number of new faces who may not be aware of the issues, stated the association.

“It is a fact that some policymakers in Europe are ignorant of the critical role that Bermuda plays as a capacity provider for European insurance and reinsurance buyers. Also, particularly in recent times, reinsurance buyers have been very keen to diversify their credit risk by using wider markets than the local reinsurance groups. The Bermuda reinsurance and insurance companies give choice and buyers a range of counterparties,” said Mr. Kading.

Mr. Butt and Mr. Kading hope that the need for diversification and such figures, combined with the support of the insurance and reinsurance-buying community in Europe, should help to convince the E.C. that Bermuda has to be one of the first jurisdictions to be considered for equivalence.

The timing is important, according to lobbyists in Brussels, because it is thought that the E.C. has decided to split its assessment on equivalence into two waves. The first will start in June of this year and the second after Solvency II has been implemented in 2012, or as some now predict 2013 after the 2012 numbers have been put to bed.

For this reason it is doubly important for the Bermuda market that recent progress made on the development of the Bermuda supervisory system into a modern, risk and principles-based regime that meets or even exceeds the standards of Solvency II by the Bermuda Monetary Authority (BMA) is maintained, said the Bermuda delegation.

“The key is to ensure that the Commission understands the significance of this market and it is considered for equivalence in the first wave. So we need to make the case for Bermuda. We have to ensure that Bermuda is compliant before Solvency II is in place. It is a work in progress of course, but, we are doing the work and we need to do so to obtain a fair hearing,” said Mr. Butt.

“The BMA is putting a considerable amount of time and energy into the effort to ensure that our regulatory system is as consistent as possible with Solvency II and the market is fully supporting that. It is also important that we have the support of the customers in Europe, both primary and reinsurance buyers, to say how important the Bermuda capital is to help them solve their risk requirements,” he continued.

If the European Commission has limited time and resources to assess equivalence for all non-E.E.A. territories for equivalence before the implementation of Solvency II, then some market experts believe that the race for inclusion in the first wave could become an increasingly intense competition.

Mr. Butt said that he does not see it like that. “Bluntly I do not see any competition or indeed regard this as a competitive situation. There is no competition between Bermuda and Switzerland or Guernsey, for example. We are offering 40% of the world’s catastrophe capacity so it is very different to what Guernsey has to offer. It is not clear yet what criteria will be used to measure equivalence. But, in simple terms, I cannot see that it would be greater than a Standard & Poor’s A- rating or the requirements for a New York Stock Exchange listing, both of which all Bermuda players meet,” he said.

Of the threat of a potential protectionist lobby in Europe that may try to protect the local insurance and reinsurance industry by the exclusion of competitive non-E.E.A. insurers and the threat of a call for collateral, Mr. Butt said that this was not a debate that ABIR could enter into.

“We do not know enough about local internal politics within the European Member states. Is there protectionism at a national level in Europe? Yes. But we cannot seek to manage that. That is up to Members of European Parliament [led by Peter Skinner, Rapporteur for Solvency II and the man responsible for guiding it through the political process],” he said.

Commercial Risk Europe holds its first seminar in Brussels today (April 15) to discuss the implications of Solvency II for European insurance buyers and the wider market and the potential impact on captives in particular. A number of the key questions raised by ABIR will be posed to speakers involved in the process such as Peter Skinner of the European Parliament, Ulf Linder, Deputy Head of the Insurance and Pensions Unit at the Directorate-General Internal Market and Services of the European Commission responsible for Solvency II, Peter Den Dekker of FERMA, Marc Mathijsen, President of BELRIM, the Belgian risk managers’ association and Günter Dröse, Head of ECIROA. Coverage of the event will be published in our weekly electronic newsletter next week and in the coming May issue of the newspaper.