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Bradley L. Kading has been president and executive director of the Association of Bermuda Insurers and Reinsurers since 2005. Before joining ABIR, he served as senior vice president and director of state affairs for the Reinsurance Association of America. He joined RAA in 1991, having previously served as vice president and director of government affairs for the Alliance of American Insurers in Schaumburg, Illinois. He recently spoke with Business Insurance Senior Editor Mark A. Hofmann about the state of the Bermuda market. Edited excerpts follow.
Q: What are the biggest challenges facing the Bermuda market?
A: In Bermuda, companies are focused on three priorities: the path to Solvency II equivalence, convergence with alternative capital and business consolidation. With regard to Solvency II, the Bermuda Monetary Authority is in the final stages of law and regulation adoption to meet the (European Insurance and Occupational Pensions Authority) criteria for equivalence. The BMA continues its discussions with the European Commission, and we are optimistic about an equivalency finding for the Bermuda commercial insurance sector by the end of the year.
Alternative capital is with us for the long term, and we consider ourselves “converged,” with most members having already launched their capital markets ventures. The challenge is putting this capital to work.
On the third point, with four mergers or acquisitions an-nounced this year within the membership, consolidation is on everyone's mind. Some argue that that we are in one of those periods where it is best to have a bigger balance sheet to achieve certain efficiencies in operation. Others argue you can still be successful as long as you have a specialization. The market is deciding that now as we speak.
Q: Where are opportunities for growth in the market?
A: By year-end, Florida will have shed half of its residual market risk. This is due to successful takeout programs and purchase of efficient risk transfer products by the Florida Citizens (Property Insurance Corp.) program. Citizens recently announced it will be able to cover a 100-year hurricane without resorting to debt issuance and the necessary hurricane taxes to pay off this debt. This is a remarkable accomplishment. In the U.S. market, coastal residual markets in Florida, Louisiana and Texas continue to depopulate. This is largely due to increased availability of reinsurance and increased investment in specialty insurers (creating them or expanding their footprints) willing to underwrite coastal risk.
In California, the California Earthquake Authority is experimenting with alternative de-ductibles to try to generate interest in consumers in buying protection against earthquake shake damage. At the federal level, the extension of (the federal government's terrorism insurance backstop) brought some opportunities for purchase of additional private terrorism insurance. Everyone is experimenting with some new products in cyber insurance. It's a market with tremendous growth opportunities and tremendous uncertainty.
Q: Are you concerned about any legislative or regulatory initiatives?
A: The Global Reinsurance Forum has identified protectionist measures in more than 24 countries around the world that limit cross-border reinsurance trade. This is quite discouraging, and it is largely a legacy of the 2008 global financial crisis.
The fight against the discriminatory reinsurance tax goes on in the U.S. It should be clear to all that insurers are successful when they can pool and diversify risk; any tax or regulatory impediment to this necessary use of affiliate reinsurance should be opposed.
Limits on cross-border reinsurance, affiliate or nonaffiliate, will result in increased concentration of risk within jurisdictional boundaries and less competitive markets.
Sharon Cunninghis is the leader of Mercer L.L.C.’s private health insurance exchange, known as the Mercer Marketplace, which offers coverage to about 500,000 employees and retirees. In an interview with Editor-at-Large