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Brian M. O'Hara is part of one of the great risk management and Bermuda success stories.

As chairman and chief executive officer of X.L. Insurance Co. Ltd., he presides over an insurer that started out as a kind of policyholder self-help group but has become one of the world's major insurance and reinsurance companies and one of the principal jewels in the Bermuda business crown.

X.L. grew out of the liability crunch in the mid-1980s, when Marsh & McLennan Cos. Inc. and J.P. Morgan & Co. put together the then-policyholder-owned facility to offer the excess liability coverage traditional insurers had shunned.

After writing $206.6 million in gross premiums in 1986, its first year of operations, X.L. grew to gross premiums of $729.4 million at year-end 1996.

Along the way, Mr. O'Hara has helped take the company public and lead it into other lines of insurance. Today, X.L. will cover not only its core excess liability and directors and officers liability risks but also property, employment practices liability, single aggregate and multiyear coverages, reinsurance and even currency risks.

Mr. O'Hara first became interested in Bermuda as a child through family connections with the island. Then in 1976, while working for General Reinsurance Corp. in San Francisco, the personal interest began to include his business interest when he read an article on the offshore insurance market and captives. The article "struck a chord," he recalled.

In 1978, he assumed responsibility for the newly developing department for captive reinsurance underwriting at General Re.

He later left General Re and helped found Trenwick Group and opened its Bermuda office in 1979.

In 1986, he joined X.L. as president and chief operating officer. He has been there ever since.

He also is president and CEO of EXEL Ltd., the holding company for X.L. and other subsidiaries.

Mr. O'Hara, 49, discussed developments in the excess liability and Bermuda insurance market with New York Bureau Chief Gavin Souter.

As you look back on the liability insurance market, what would you say has changed the most? What have been the fundamental changes?

Bermuda has seen a big change on the whole liability landscape. Back in the early 1980s, reinsurance was a big driver of underwriting capacity, and there was a proliferation of MGAs who would get an issuing paper, set up a treaty and then buy lots of facultative reinsurance, and that is how the whole system kind of worked. That all collapsed in 1984-1985, and that's where the Bermuda big net line underwriting came into play.

But now we see change back the other way, where you see new entrants into casualty underwriting backed by both treaty and facultative reinsurance. It's not that Bermuda is going away, but that other part had gone away. It had vanished for five or six years, but now some of the practices that were pronounced dead are re-emerging.

Is it headed for the same result?

Inevitably. There is not enough accountability in that system, and not enough strength in the structure, because the decision for the capacity to persist is an annual decision, and as bad results come in, those decisions will be negative. There will be changes and some will depart. It's part of the cyclicality.

So not a lot has changed then?

As we know the world today, it hasn't, except that the existence of large net line capacity is here and is here to stay.

Large net line capacity this time was put in the hands of professionals, and the capital was provided by very serious-minded people.

In the early '80s, they thought it was a cash cow that couldn't go wrong. A lot of the captives were successfully underwriting the business they controlled, but they did not realize that underwriting someone else's business that they didn't control is a different kettle of fish.

They thought that it was so automatic that they didn't need to hire true professionals. They hired total amateurs, who all departed from the scene long ago.

In that business, the top line can look really good for a while until the results come in, and I suspect that we are going through a similar period now.

What difference do the large net line insurers make in terms of insurers' relationships with their clients?

We hope and expect to continue long-term relationships with our customers, which we have enjoyed since the beginning.

We'll lose more and more of those who are driven by price and availability and who probably don't care about the fact that it won't necessarily be consistent, because they feel there is so much capacity that they can go back to the net line providers when the reinsurance-backed providers go away. And that remains to be seen, whether they will be able to or not, because I can't predict what our behavior will be in that regard two or three years down the road.

What would stop you from taking them back?

Maybe we'll be fully preoccupied by existing customers.

X.L. has been one of the success stories of Bermuda, but looking back with the benefit of hindsight, what do you think could have been done to have made the company even more successful?

I suppose we could have diversified sooner than we did. I guess that is a difficult question for me to answer without sounding self-serving. In the beginning, we not only did a lot of things right, but we were real lucky, too -- and it's always nice to be lucky.

In what way were you lucky?

Early experience was marked by an absence of catastrophes.

We didn't have any losses for the first three years, so we were able to build up reserves and capital, and that got us beyond the critical mass we needed.

We could have done all the right things, and then if silicone implant litigation had hit in year two, it would have been a different story today.

Looking back, I forget just how frightening it was taking on Fortune 100 companies at a $25 million attachment point and putting out $75 million. Having done it now for 11 years we have become a little blase about it, but it was downright scary, and we held our breaths for the first two or three years.

We were fortunate that when we did get hit with a wide, sweeping catastrophe, like silicone, we had matured financially, so we were able to ride it out without any real hiccup.

Again, we were lucky that we didn't get hit with another big loss. If EMFs had turned out to be another huge financial catastrophe on the heels of silicone, it would be a different story. So I guess you always hope for a little luck in the business, but if you count on it, you are in trouble.

What was the thought process behind your diversification?

Diversification gives us a broader reach and a broader relationship with our core customers, which is part of what our multiline "Risk Solutions" effort is all about.

The Risk Solutions approach is where we are not only managing the traditional risks but adding things like currency risk management and other business risk elements.

Did you feel you had to diversify? Could you have continued to have been a successful company by just focusing on excess liability and D&O?

In order to grow, we had to add our new lines, because the core GL business had reached something of a saturation point, and at the same time, more and more new capacity was entering into the business that was going to take business away from us. In order to utilize our capital base, we had to grow, but we didn't want to grow in areas we didn't know or understand or where we wouldn't meet our customers' need.

Do you think investors are any more demanding now?

I've always found them demanding.

Our original investors were our policyholders, and they had an entirely different mind-set. They were driven by having stable capacity not so much as return on investment, and some of them didn't think they'd ever get a return back.

There was a minority that invested for a return, but for most of them it was very pragmatic -- it was the only way for them the buy casualty catastrophe insurance.

The transition from those shareholders to the public shareholders was a trying experience. Our investment banker, Goldman Sachs, did not think it was possible. They did not think that the capital markets would be receptive to what we did for a living.

At the same time, a large portion of our policyholder shareholders did not think going public was a good idea. They thought that we would lose our focus and, in trying to satisfy investor demands, we would give up our promise to maintain a stable market for these large, difficult risks.

I think so far that we've shown that we can do both. That those interests are not opposed, that it can be a win-win situation.

Would you say the customers and risk managers have changed much over the years?

Certainly, the actual people have changed.

The sophistication and understanding of the business is much greater. We wonder whether the recent experience of fewer large losses isn't necessarily correlated to better risk management practices and greater awareness at the top of organizations as to the value in better risk management.

What future changes do you see in the insurance industry?

The industry has to deliver more value over time.

It's probably true in all industries that costs are being squeezed out, and levels of costs being eliminated.

In the large-risk area, the larger corporations are becoming more sophisticated and more demanding, and people are thinking in more untraditional ways, so they are going to do business with people who can give them more for less cost. It's that simple.

Currently the market is meeting the demands for less cost, but the question is, is that sustainable? Is it due to structural changes, or is the industry just underpricing the product again?

It's easy to do that in our industry for a period of time, because the costs don't come in for a while, and admittedly the costs are hard to know in our industry as opposed to manufacturing industries and other service providers.

We provide a promise, and no one is quite sure what the cost of that promise is from time to time.

We are trying to come up with ways that are less expensive, because they are fundamentally more efficient.

In Bermuda there are some fundamental cost advantages with the regulatory and tax structures being what they are, and that can be passed on to the customer.

What we are now trying to do is broaden the array of risk transfer services that the core customers want so that they can concentrate on whatever their core business is.

They don't want to spend a lot of time and effort on worrying about the unknown or unforeseeable; that is what we think our job in life is.

As you try to do that job, are you going to venture even further outside the traditional realms of insurance?

The product will become more diverse, I think.

We still will call it insurance, but we shall be doing things differently from the way they were done in the past, perhaps.

In what way?

The length of time over which the products function; investment income may become part of the equation on a direct basis, not just on a computed notional basis; and our vision is that there will be a blending of the traditional lines with non-traditionally insured business risks that have been managed through other means, whether they be banks or derivatives, hedging or the way they've conducted business fundamentally.

I can't say what all those things are, but I believe that the demands of the customers and the pressures they put on us will force the winners to come up with mechanisms and means to deliver those broader protections.

What about Bermuda? Can Bermuda grow much more?

There are physical limitations, but it can grow more in terms of the sophistication of the product it delivers.

It'll grow more, probably as something of a headquarters attached to a more global presence. So where labor-intensive things may be done in a London or a New York, or a Singapore for that matter, there could be expansion from Bermuda back and out.