Artex Risk Solutions
After recently joining Artex Risk Solutions, William Wood discusses how the Bermuda captive market has changed since he first started working on the island
You have more than 25 years of experience in Bermuda, how has the market changed since you first starting working within the domicile?
There has been a significant change since I began my career. I spent my first six years in captives then left the industry and worked a variety of roles in the commercial reinsurance space for 10 years, before returning to captives again nine years ago. So that absence made it easy for me to see that quantum shift. When I started, the majority of captives were writing traditional lines with a relatively light regulation, primarily involving simple balance sheet solvency and liquidity hurdles. Group captives were the closest thing to ‘exotic’.
For many years, the captive business was very much in the doldrums, in the face of both competitive and reducing commercial rates. Captives continued to solve problems but there was no cohesive groundswell in terms of development, and many existing captives went into run-off. After recovering from the recession of 2008, the financial world was awash with capital looking everywhere for return on investment and diversification. The hedge fund model was born out of that, accepting 100 percent combined ratios or worse, relying on enhanced investment returns on essentially free cash flow.
During this time, the captive industry – always resourceful – started to innovate and now captives are being used for more creative solutions, writing new cutting-edge lines such as cyber, and spawning a completely new offshoot industry in insurance-linked securities (ILS). Managers too adapted, for example, some providing permanent or semi-permanent ‘back office’ support for new commercial reinsurance companies in the Bermuda theatre. Both these examples are something that Artex is well versed in.
What is the current market climate? And how has the captive market played out during COVID-19?
Even before COVID-19 began, there was a hardening of commercial rates taking place. Speculation of this had been mooted for three or four years but with no fruition. However, this time, rates were turning and coverages were being withdrawn, in some cases within the traditional risk transfer markets. Consequently, there was a tangible uptick in captive activity.
Now with COVID-19 acting as a further market disruptor, the expectation is that it will give rise to further opportunities for captive solutions. No doubt there may be some negative implications too, but net, the industry sentiment seems to be positive for captives.
What are the biggest opportunities within the Bermuda captive market?
Besides those previously identified, there are positive trends in the commercial license space. The Bermuda model works well for long-term insurers as evidenced by the substantial growth in this sector. That growth currently shows few signs of abating. Legacy operations are another trend.
As mentioned earlier, captive managers are increasingly involved in the formation of purely third-party commercial writers.
However, the model for these new companies is to continue outsourcing certain back-office functions to captive managers on a medium, if not long-term basis. Artex is involved in a number of these with some going back several years.
What challenges are facing the Bermuda market right now?
The biggest challenges are regulation and compliance.
There has been a large increase in the amount of legislation and policy over the last three years or more and this work-body continues to grow.
Whether right or wrong, it is inevitably a requirement to be a viable and leading jurisdiction on the global playing field. #However, it is critical that those driving these initiatives do so judiciously.
As managers, it adds significant pressure, requiring materially more work to support the same client base whilst, to most clients, there is seemingly no value-add.
In effect, it is increasingly difficult to remain cost-competitive as a jurisdiction and cost-efficient for existing clients.
Economic substance and minimum cyber standards are the latest of this ilk. However, COVID-19 has perversely put certain aspects of the former on hiatus.
How do you expect the rest of the year to be, and going into next year?
My feeling is that this is an optimistic time for captives and captive managers though not without challenges of course.
However, there does seem to be a change in the air, and an expectation of shifting times, all for the posit
