Sarasota Herald-Tribune’s Paige St. John Reports on Florida Reinsurance Issues

Oct 28, 2010

The following articles by Paige St. John relating to Florida reinsurance issues were published in the Sarasota Herald-Tribune beginning October 24, 2010. Following the articles are responses from various insurance industry representatives.

Property insurers sending billions overseas

Reinsurance firms profit as reserves dwindle

Florida’s extensive spending on reinsurance helps fund the industry’s annual gathering at Monte Carlo. STAFF PHOTOS / PAIGE ST. JOHN

By Paige St. John, Sarasota Herald-Tribune
Published: Monday, October 25, 2010 at 1:00 a.m.

Never before have Floridians paid so much to protect themselves from hurricanes.

And never have they received so little benefit.

A Herald-Tribune investigation shows that since the state’s last spate of hurricanes, a dramatic shift has taken place. Two-thirds of property insurance premiums now leave Florida as unregulated payments to largely offshore reinsurers — companies that sell hurricane protection to insurers and that operate without rate control or consumer oversight.

They, more than state insurers and state regulators, determine how much Floridians must pay to live in the state, and whether property insurance is available at all.

Florida’s growing reliance on this profit-driven market is eroding its ability to withstand the inevitable disaster.

In the past four years, Florida-based home insurers paid out $15 billion for private reinsurance.

There has been no storm to trigger payments. Most of the money is gone, pocketed by a reinsurance industry that plays by Wall Street rules, able to rack up profits no regulated insurance company would be allowed to keep.

Without a major storm before next June, Florida’s lost capital will near $19 billion.

Had it remained in Florida, that money could have doubled the size of the state’s publicly run catastrophe fund and lowered premiums 20 percent. It could have paid for another round of hurricanes like the eight that struck in 2004 and 2005.

Instead, homeowners’ insurance premiums reached record levels in 2006 and 2007, exacerbating widespread policy cancellations. The lost capital also weakened insurance company finances, drained surplus for future storms, and pushed carriers over the edge, giving Florida the highest insurance failure rate in the nation.

The volatile reinsurance market now has such a tight hold on Florida that homeowners and the state economy are perpetually at risk of future market shocks, even those triggered by events elsewhere in the world.

The costly dependence frustrates those who would try to revive the state’s foundering property insurance market.

State Insurance Commissioner Kevin McCarty alternatively has pleaded with reinsurers to play a greater role in Florida and called them “greedy” when they extracted crushing rate hikes.

Former Gov. Jeb Bush set aside his free-market ideology to conclude Florida could not “be at the mercy of people who hope for catastrophes to keep their rates high.”

The newspaper learned that Bush secretly spent part of his last year in office seeking an alternative, lobbying his brother in the White House and fellow governors of catastrophe-prone states to create a government substitute.

Four years later, a leader of state insurance agents reached a similar conclusion.

“A large part of Florida’s marketplace problems are due to its over-reliance on reinsurance,” said Jeff Grady, president of the Florida Association of Insurance Agents.

“Yet we are a crack addict. We have to have it.”

IN ITS TRADITIONAL form, reinsurance was insurance for insurance companies, policies bought in relatively small amounts to protect carriers from the remote chance of a very large disaster.

But in Florida today, and increasingly along the eastern seaboard, reinsurance is on the verge of replacing traditional insurance altogether.

The turning point was Hurricane Katrina.

A month after Katrina, with the storm’s cost and death toll mounting, Allstate president Thomas Wilson expressed regrets in an October 2005 quarterly earnings conference call, but said that the nation’s second-largest insurer was through with hurricanes.

“We have no moral or legal obligation to provide this kind of coverage to people,” Wilson declared.

Allstate and other national carriers accelerated a retreat from risk along the American coast. “It was a turning point for not just Florida, but from Massachusetts to the Gulf of Mexico,” said state Insurance Commissioner McCarty.

From 2005 to 2008, 2.2 million Florida homeowner policies were canceled or non-renewed. The state-run Citizens Property Insurance for the first time became the largest provider of hurricane coverage in Florida.

With no viable alternative, state regulators and private insurance companies looked to offshore reinsurers to underwrite the risk posed by storms. With a few million dollars in the bank, newly formed insurers could buy large amounts of reinsurance to instantly write billions of dollars worth of coverage.

The new Florida norm are carriers like ACA Home, a tiny St. Petersburg home insurer started after 2005 with funding in part from a Bermuda reinsurer.

ACA Home has no employees and pays an affiliate, American Strategic, to run its business.

Financial filings show reinsurers take 86 cents of every premium dollar ACA collects — $9 million of the $10.5 million it collected in 2009.

The cost for turning over almost all of its risk is high. ACA pays as much as 33 cents for $1 of protection against the most likely kind of storms, the equivalent of paying $66,000 a year to insure a house worth $200,000.

The Herald-Tribune found more than half a dozen Florida insurers paying more than 50 cents for a dollar of hurricane coverage, reinsurance rates brokers say are the highest in the world.

Yet Florida’s insurers continue to buy more. They use the premium they collect to purchase additional reinsurance to write more policies, rather than retaining the money to shore up their own capital bases.

From 2004 to 2009, Florida carriers’ reinsurance bill nearly tripled, from $1.4 billion a year to more than $4 billion.

The portion of homeowners’ premium devoted to reinsurance in that time increased from 37 percent to 64 percent, according to the newspaper’s analysis of 70 Florida-only property insurers. The national average is only 19 percent.

That in turn drove up the cost of coverage for homeowners. Quarterly premium reports show the average Florida homeowner pays 72 percent more today than in 2003. The average premium has nearly doubled or more in nine coastal counties.

Florida regulators have sanctioned rates as high as $7,890 to insure a $100,000 house in Palm Beach and $13,000 a year for the same abode in the Florida Keys — making insurance premiums there as expensive as a mortgage.

The change in how Florida’s largest insurers handle risk is most dramatic. A state report noted State Farm, Allstate, Universal Property and American Strategic in 2002 spent only 7 percent of their premium on reinsurance.

In 2009, the Herald-Tribune found, the burden was 54 percent.

Annual financial reports show more than 28 Florida insurers devote more than half their premium to external coverage, some to the point of extinction.

“Nobody can stay in business spending that,” said Lara Mowery, vice president of Guy Carpenter & Co., one of the chief brokers of Florida reinsurance contracts. “That can’t be a sustainable business plan.”

FOR A GUT-WRENCHING 48 hours in September 2008, the National Hurricane Center’s skinny black line pointed like an accusation at Miami.

Hurricane Ike was barreling through the Atlantic as a Category 4, on a westerly track that had the potential to deliver the long-dreaded sucker punch that would bring Florida to its knees.

As stomachs churned in Florida, a quarter turn around the globe on the balmy Mediterranean, the reinsurance industry welcomed an American calamity.

The financial giants who underwrite the world’s risks were gathered in Monte Carlo for their annual Rendez-Vous de Septembre. Amid champagne parties and sailing races, they kept close watch on the advance of the storm.

Profits at that moment were flat and reinsurance rates falling, even in Florida.

By their analysts’ calculations, it would take a $35 billion disaster to turn the market around.

The head of research for a London brokerage sized up the hurricanes circulating in the American Gulf.

“Gustav and Hannah: perhaps unlikely to have a major impact …” he told financial writers in the plush salon of a Monte Carlo hotel, as they picked over silver trays of tiny lime tarts.

“But Ike …” he said, turning his attention to the storm worrying Miami, “… depending on which way it goes, it could be a turning point, ladies and gentlemen.”

There was nothing in his tone, nor the reaction of those taking note, to reveal they were discussing the decimation of another American city.

There is a perverse tendency for the reinsurance industry to hope for disaster.

The cost of calamity coverage is determined mostly by supply and demand. Big disasters can temporarily dampen quarterly profits and even kill a few unlucky reinsurers, but they drive up demand and draw down capital, shrinking supply.

The result is record profits made on the back of the world’s biggest catastrophes — Hurricane Andrew, 9/11 and Hurricane Katrina.

The macabre sentiment pervading Monte Carlo in 2008 was parodied a few mornings later at the Cafe de Paris, where reinsurance brokers massed 20-deep for preliminary negotiations on the hurricane contracts for which Floridians would pay the next year.

“Industry mourns the passing of Gustav,” joked a headline in the Rendez-Vous edition of the normally sedate Insurance Day.

By missing New Orleans, the trade journal quipped, the hurricane had “failed to destroy billions of dollars worth of energy infrastructure and make millions of uninsured poor people homeless.

“An executive from a Bermuda start-up said he had lost everything as a result of the non-storm …

“‘I’ve got everything riding on a big one.'”

THE REINSURANCE INDUSTRY is much like the high-priced casino where reinsurers gather every fall.

The money on the table comes from the world’s richest investors — institutional funds, global bankers and, increasingly, U.S. hedge funds.

The objects of their betting are hurricanes, typhoons and earthquakes, as well as pandemic diseases.

Their biggest wager is Florida.

The state has more than $2 trillion of property parked on the edge of the world’s hottest hurricane zone. No other insured peril in the world comes close in potential losses.

“Florida is the, by far, the number one ‘cat’ risk in the world. Bar none. By a factor of two,” said Harbor Point Re vice president Greg Richardson.

But the risk of a hurricane accounts for only a fraction of the price reinsurers charge. The majority of the cost is driven by how much profit investors demand, and whether insurers are desperate enough to pay those rates.

“It’s like a game of poker,” John DeMartini, vice president of risk for Towers Watson, a national broker of reinsurance contracts, told the Herald-Tribune.

The game is uneven.

Florida insurers are particularly needy buyers, hence they have little choice to refuse what reinsurers demand to be paid.

“It is a diabolical situation insurers find themselves in,” DeMartini said.

On average, the Herald-Tribune calculated, reinsurers charge five times more than the actuarial risk of loss.

The translation for Florida property owners: For every $1 in hurricane risk to their home, they pay another $4 for the reinsurer’s profit. In other words, if a reinsurer determines a home is likely to sustain $2,000 in damage in a year, it will charge $10,000 to cover that home.

In reinsurance, such math is unquestioned. It is not “undue profitability” but “the cost of capital,” concluded an industry-funded study by the vaunted Wharton Risk Center at the University of Pennsylvania.

“Insurers need considerable capital to supply this insurance and the cost of that capital is included in the premium,” they note.

After Hurricane Katrina, some of the highest rollers providing $33 billion to recapitalize the reinsurers of Bermuda included Lehman Brothers and Goldman Sachs, and private investors recruited by Jeff Greenberg, son of former AIG chairman Hank Greenberg.

These new players demanded paybacks equal to or better than the heady profits rolling off mortgage-backed securities. They sought return percentages from the mid-teens to high 20s, Mike Millete, a managing director of Goldman Sachs, told reinsurance executives during a 2006 industry forum in Bermuda.

In the end, Bermuda reinsurance investors saw a record return on equity, according to a Guy Carpenter analysis. Greenberg had a 26 percent return on Validus Holdings. Lancashire Re gave its New York private equity fund investors a 33 percent return. And in 2009, the largest reinsurer of Florida carriers reported a 38 percent return.

Being in Bermuda, the profits were tax-free.

On the other hand, Florida regulators limit property insurers to a 3.7 percent annual profit on their underwriting activities.

“Putting aside the tremendous human cost of natural catastrophes, as an investment category, cat risk is actually quite wonderful,” Greg Richardson, vice president of Harbor Point Re, told his peers at a summit in 2008.

AS INSURERS SPEND more on reinsurance, they have less money to set aside for future storms.

Called policyholder surplus, this stash represents the first line of defense for hurricane claims.

To the alarm of industry watchers, it is weakening.

The surplus held by Florida-based insurers in 2003 was $2 billion. It is now about $2.4 billion — an increase that has not kept pace with the amount of property these companies insure.

In 2003, Florida insurers had 65 cents in the bank to back every dollar of brick and shingle they insured.

Now it is 42 cents.

The decrease is all the more alarming because it occurs during a lull in hurricane activity, when Florida insurers should be building capital to withstand future storms.

And it comes despite record revenues. Insurance premiums statewide have climbed from an average $850 per home in 2003 to $1,458 in June.

But in three of the past four storm-free years, the total amount of surplus held by Florida-based insurers gained only minor ground. In 2009, when reinsurers raised their Florida rates to counter Wall Street losses, it actually dropped.

For some insurers, the surplus drain became a death sentence.

Since 2009, 10 carriers have fallen so short on capital they have been forced to close, been placed under regulatory consent orders or had their financial ratings withdrawn.

Florida last year led the nation in property insurance company failures.

THE VIEW OFFSHORE is much brighter.

The U.S. hurricanes in 2005, particularly Katrina, left the Bermuda reinsurers that provide most of Florida’s hurricane coverage with net losses of $2.1 billion.

Those same reinsurers reported profits of $11.6 billion in 2006 — a record — and $11 billion in 2007.

Those running the companies fared well, too.

Executive pay for the top five officers at Renaissance Re — Florida’s biggest reinsurer — quadrupled from $6 million in 2005 to $28 million in 2009. CEO Neill Currie’s latest $7.6 million compensation package included nearly half a million dollars to allow him and family members to fly between Bermuda and his home in North Carolina.

“They load the boat on the profits they make in Florida,” said Jeff Grady, the president of the state agents’ association.

Nowhere are the riches from Florida more on display than when the industry gathers on the French Riviera for its annual convention in Monte Carlo.

For a week during the height of the Florida hurricane season, the extravagant gambling resort is packed with hundreds of reinsurers and brokers who negotiate their contracts.

There is a single scheduled event — a poorly attended speech on some aspect of the market.

Tradition demands a sailboat race at the Monte Carlo Yacht Club. Some years there is also a road rally through the south of France in collectible cars.

Only a few contracts get signed in this open air market.

The bulk of the week is devoted to “building relationships,” a function some reinsurance brokers say they hold more important than the price for any one year.

In 2008, as Florida gambled with the weather, hundreds of reinsurance underwriters and brokers packed the marbled lobby of the Hotel de Paris and commandeered the outdoor tables of the Cafe de Paris, befuddling cruise ship tourists who had nowhere to go.

Brokers huddled over spreadsheets beneath bronze busts of Louise XIV or scribbled notes against a grand piano or beneath a Greek nude. The bigger reinsurance houses held forth from private salons and yachts tied up in the harbor.

“Uncivilized, isn’t it?” a Bermuda broker remarked unbidden, taking refuge in a slice of shade at the cafe as he awaited a turn at the strangely public discussions, the subject of which was death and destruction.

At sundown the din yielded to a frenzy of sumptuous dinners and endless champagne.

The brokers from Guy Carpenter held a huge party in a ballroom beneath a ceiling papered in gold, lasers casting corporate logos atop the bathing nudes painted on the walls. “Do you realize $1 trillion of wealth is in this room right now?” remarked the impressed publicist for a catastrophe modeling firm.

On the next block, top-hatted magicians on stilts greeted delegates who entered through a veil of tiny bubbles, tossing firecrackers over their heads.

The impeccably dressed hosts from Dubai handed out party favors of oversized billfolds, while a bus crouched at the curb to ferry brokers to the next soiree.

On the terrace, a trio of sequined starlets slid among the strolling financiers, trailed by backup dancers.

“They tried to make me go to rehab,” they crooned to the drinking brokers.

“I said, no, no, no …”

How Bermuda rigs insurance rates in Florida

Renaissance Reinsurance, the largest private source of Florida hurricane coverage, dominates the waterfront in Hamilton, Bermuda. The company reported a 38 percent return in 2009 even as Florida insurers struggled to stay afloat. PHOTO PROVIDED BY MARK TATEM

By Paige St. John, Sarasota Herald-Tribune
Published: Monday, October 25, 2010 at 1:00 a.m.

In early 2006, Florida was on the verge of a financial disaster.

After two deadly hurricane seasons, major insurance carriers were leaving, smaller companies struggled to raise capital and Florida families scrambled to find coverage and pay escalating premiums.

As they strove to recover from the eight hurricanes of 2004 and 2005, Floridians took another hit – from Bermuda reinsurance companies that seized on the crisis to double or triple their rates.

These reinsurance companies, which insure the insurance companies, are the lifeblood for scores of under-capitalized, highly leveraged start-up insurers. Most carriers could not remain in business without costly reinsurance policies geared to cover their losses.

But in 2006, many reinsurers reduced the storm coverage they were willing to give Florida. Some purposefully refused to write policies for months, convinced they could extract an even higher price from insurers that neared collapse.

First-hand accounts, brokerage reports and copies of reinsurance contracts written that year show Florida insurers were still cobbling together hurricane protection in August and September, during the peak of danger, and paying three times the January rate.

The cost was paid by Florida property owners, some of whom suddenly faced premiums as high as their house payments. Real estate agents complained they were losing home sales as buyers no longer qualified for mortgages, and Florida bank leaders trouped to Tallahassee begging relief.

The squeeze was legal, and opportunistic.

“That’s what we saw after hurricane Andrew and that’s what will happen again, in my opinion, the next time we have a major hurricane,” said Steve Alexander, actuary for the office of the Florida Insurance Consumer Advocate.

REINSURANCE OPERATES ON a global scale, regulated to some extent in Europe and hardly at all elsewhere, especially in Bermuda, a tax haven.

The tiny volcanic rock 600 miles east of North Carolina is home to nearly half the reinsurance sold to Florida, a $470 billion powerhouse crammed in a few blocks between the rum bars and T-shirt shops.

There are more than 1,200 foreign insurers incorporated in this oceanic frontier town, including 59 reinsurers that provide billions of dollars of hurricane protection for nearly every home in Florida, from swamp trailer to coastal high-rise.

They crowd and color every aspect of Bermuda. With no place to build, newcomers worth hundreds of millions settle for whatever they can lease. Two cram offices next to a hair salon, heralded by wooden signs of equal size.

With no place to park, wealthy executives buzz around on motor scooters, ties flapping and knees peeking beneath colorful Bermuda shorts, one of the persisting oddities cultivated by the island’s financial expats.

An industry broker once dubbed them the “almost-pirates of the almost-Caribbean.”

Bermuda’s regulations are famously light, exposing consumers to business practices designed to reduce competition and encourage price-fixing.

Solvency requirements exist, but they are dramatically light compared with what private financial rating firms consider reasonable. Only the island’s 37 largest reinsurers must file audited annual reports. Only 29 of those agree to make the document public.

The only other records Bermuda allows the public to view are kept in a drab office building two blocks from the harbor. Hidden on the third floor, behind a wobbling counter propped against the wall, a government clerk will fetch all that Bermuda cares to make public about the financial giants who shoulder Florida’s tremendous hurricane risk.

The manila files are virtually empty.

What they do contain is unhelpful – mostly lists of island lawyers who serve on boards of convenience that hide the real owners and decisionmakers.

THE STREETS OF New Orleans were still flooded in 2005 when reinsurers started raising money to pay for Hurricane Katrina and take advantage of the market boom expected to follow.

By December, Bermuda’s reinsurers had raised $17 billion from eager investors, primarily hedge funds, private equity firms and U.S. investment banks such as Merrill Lynch, Goldman Sachs and Lehman Brothers.

But the flood of new money was not used to make more hurricane coverage available to Florida.

Reinsurance contracts and comments by executives show that even when they had money in the bank and board approval to use it, Bermuda reinsurers cut the capital they were willing to allot to Florida.

The layoff in part was driven by the belief global warming had increased hurricane risk, a view backed by some scientists hired by the insurance industry.

But it also was driven by a hunger to maximize profit – to, as ACE Ltd. Chief Executive Officer Evan Greenberg told investors in a 2006 earnings call, “ruthlessly take the elevator up at the right times.”

Rather than just ride Katrina-driven price increases, the Herald-Tribune found, reinsurers worked to make them bigger. They sat on business they normally would have signed. They turned away Florida insurers they normally would have backed.

“It’s a good tactic to do this,” Aspen Reinsurance CEO Chris O’Kane told stock analysts in early 2006. When he spoke, Aspen had written only half its normal Florida contracts.

“We’re confident that we will be able to replace a significant part of this lost exposure by the middle of this year at much better prices.”

O’Kane expected reinsurance prices to double because Aspen was not the only reinsurer refusing to write. Other reinsurers also were holding out.

Axis Capital chairman John Charman started the Florida writing season predicting severe shortages, and ended it by confirming in an earnings call, “We held back capacity.”

Other reinsurers were willing to write policies but seized on the opportunity to boost profits in other ways.

Montpelier Reinsurance, for example, stopped selling a broad form of coverage on which many Florida reinsurers relied and offered a more expensive substitute.

CEO Anthony Taylor urged analysts to be patient as the Bermuda reinsurer turned away early business. He would make it up later, he promised, earning 30 percent more while writing half the risk.

“This is an unprecedented market disruption,” Taylor said in the conference call, “providing opportunities for those who have available capacity.”

By July, Florida’s cost to reinsure against the biggest hurricanes had tripled.

Aspen’s O’Kane told analysts he still was withholding capacity, confident Florida insurers would return in a few months as “distressed buyers.”

Florida home insurers complained prices rose so fast they were “written in pencil.” Security First president Locke Burt, seeking rate increases of his own, told regulators he would secure a quote only to discover “a month later our price was two times, then three times” the quoted amount.

Florida regulators began a watchlist of insurers without full coverage at the start of hurricane season. Industry sources said five insurers were put under temporary supervision. Records obtained by the Herald-Tribune show at least one, United Property and Casualty, was still short in mid-September and operating under a regulatory consent order, even as it sought a state loan to expand.

The average cost of reinsurance coverage in Florida climbed from $9.90 per $100 in exposure to $20, the highest in the nation.

The average home premium increased 80 percent. Residents near the coast saw increases of 300 percent. More than 300,000 Florida families lost their private coverage, forced to find a new company or join Citizens, the state-run insurer of last resort.

A few industry leaders were troubled. Bill Riker, president at the time of Renaissance Reinsurance, said the Bermuda reinsurers overreached, hurting their own market. “The reinsurers didn’t do themselves well at all,” he told the Herald-Tribune. They “lost track of what they’re all about.”

Most reinsurers simply rejoiced. Aspen Re ended the year with a $378 million profit, more than double what it lost to Katrina.

THANKS TO ANOTHER industry practice, every reinsurer enjoyed a piece of the profit, even if they had sat out the squeeze play.

A Florida insurer typically needs to buy reinsurance from a dozen or more reinsurers who each agree to pay a portion of the losses.

But the prices on those contracts are set by consensus, not competition. And only a handful of the largest reinsurers participate in the negotiation phase.

A reinsurer who has the largest share of the contract, or takes the last essential piece of it, can drive up the price everyone charges, even if there are others willing to take less.

The widespread use of “best terms” clauses ensures that every competitor on a contract gets the highest rate paid.

It robs consumers of the benefit of competition.

Industry leaders contend the process stabilizes prices and protects consumers from reinsurers that might bid too low and go broke when disaster strikes.

Some downplay the impact and argue the alternative could create more problems.

“I don’t think it restricts competition at all,” said Ken LeStrange, CEO of Endurance Specialty Insurance Ltd., one of the largest Bermuda reinsurers of Florida property insurers. Open competition on price, he said, “would be quite chaotic. I don’t see it happening.”

Florida is particularly vulnerable to the lack of competition.

The state represents the largest catastrophe risk in the insured world. It also has more small, thinly capitalized insurance companies than any other state.

Thus, Florida demand for reinsurance almost always outstrips supply, most of which comes from a few dominant reinsurers.

“It’s an oligopoly, I don’t know what else to call it,” said St. Johns Insurance president Reese Bowen.

Oligopolies can artificially drive prices higher without explicitly trying, a practice economists call “tacit collusion.” Such actions are difficult to control and frustrate antitrust authorities, international law expert Sigrid Stroux told the Herald-Tribune.

What’s more, the insurance industry as a whole is largely exempted from antitrust laws.

“It’s not a free market when people conspire to set rates,” said U.S. Rep. Bill Posey, a Republican from South Florida who for years chaired the state Senate’s insurance committee.

American regulators have raised no challenge to consensus pricing. But controversy surrounding its use overseas prompted the European Union to investigate in 20007.

Examiners concluded such practices distort market prices, “to the benefit of the reinsurers imposing it and to the detriment of the reinsured.”

Brokerage reports show state residents suffer even when a big storm like Katrina is not distorting the market.

A glut of capital and soft markets drove U.S. reinsurance prices down 15 percent in 2009. But in Florida, according to insurance broker Guy Carpenter & Co., they fell only 5 percent.

MOST OF THE MONEY behind Bermuda reinsurers comes from the U.S., as does most of the business. But the profits Bermuda reinsurers make are, under Bermuda law, tax-free.

Regulation of Bermuda’s 1,240 insurers is left to the Bermuda Monetary Authority, which is not an arm of government. The independent organization is run with oversight from a board that includes executives of the very companies it oversees.

The system is structured to allow multimillion-dollar ventures to spring to life in weeks. New executives and their business plans are reviewed by a panel of executives from other firms, not by regulators.

By comparison, it takes months of regulatory review to launch a Florida insurance company. State officials require criminal background checks and must examine the capital sources behind a new company.

Solvency requirements, though changing, remain light. In 2008, Bermuda for the first time determined how much money a reinsurer needed by how much risk it assumed. But the level was set so low it provided little protection.

Renaissance Re, the largest carrier of Florida hurricane risk in the world, needs $316 million to meet Bermuda’s requirements. To keep an A grade from financial rating firm A.M. Best, it carries more than $1.5 billion.

In places, the lines between regulator and regulated are blurred.

Paula Cox is the Bermuda prime minister of finance, as was her father before her. She also is a lawyer for ACE Ltd., the island’s largest reinsurer. Her brother, Jeremy Cox, is the supervisor of insurance, responsible for setting the standards Bermuda reinsurers must meet.

Supporters argue such intimacy is why Bermuda succeeds.

“There are few secrets here,” trade representative Brad Kading noted in an essay on Bermuda reinsurance. “That serves a self-policing role in meeting the business ethics tests.”

Bermuda officials and their supporters insist the island is making strides in matching European countries.

“You could use ‘light touch’ as a pejorative, or you could use it as the way to go,” said David Ezekial, president of International Advisory Services, a Bermuda firm that specializes in launching new reinsurers.

They also point out billions of dollars from Bermuda helped rebuild after Katrina.

“We are good for America,” said Axis Re chairman Michael Butt. “In 20 years’ time, this is going to be Florida’s survival.”

Bermuda’s reinsurance record is not spotless

Reinsurance giants crowd tiny Hamilton, Bermuda, where they can avoid taxes while staying close to their U.S. clients and investors. STAFF PHOTOS / PAIGE ST. JOHN

Sarasota Herald-Tribune’s Paige St. John Reports on Florida Reinsurance Issues

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