Insurance is is becoming more entrepreneurial, and the winners are those who never stop learning. David Fox reports Advocated US tax reform could pose a threat to the lure of Bermuda as a tax-advantaged domicile. Conservative forces in the US are talking up the possibility of scrapping the current income tax structure, in favour of a simpler form of revenue raising.

President and CEO of EXEL Ltd., Brian O'Hara, has it on good authority that the Republican Congress is very serious about getting a value-added tax in place which would eventually replace income tax.

Speaking at the Bermuda Insurance Institute (BII) monthly luncheon at the Princess Hotel, Mr. O'Hara said that was confirmed recently by chairman of the US House Ways & Means Committee, Bill Archer, a frequent visitor to Bermuda.

"This is not good news for us,'' Mr. O'Hara remarked.

The leading insurance executive was discussing the needs of risk transfer buyers in the next millennium with the prevalence of "change'' in general in the market, and the agents of change: cycles, competition, capital, consolidation, concentration and convergence.

Change, he said, can be our friend or our enemy, as it shapes the insurance and reinsurance marketplace.

"Will current changes be the Bermuda market's friend or foe, this time?'' he asked. "Will we still be around?'' Key emphases for the future include the need for a sustainable competitive advantage and the value proposition for the customer.

Mr. O'Hara said, "Competitive advantage in Bermuda revolves around tax and regulation.

"When I first came here 20 years ago for a captive conference, someone said the only threat to Bermuda was sensible tax policy and regulatory reform in the US and that being the case, Bermuda was safe. I used to laugh, but not so much today.'' He talked of proposed US legislative moves that would allow direct competition freely among banks, insurance companies and securities companies.

Mr. O'Hara recalled how industry forces in the US watched billions of dollars in policyholder capital come to Bermuda to form ACE Ltd. and EXEL Ltd. in the mid-1980s.

And in 1986 the same forces ensured that the Related Party Premium Income measure was put in the Tax Reform Act of 1986, which made it disadvantageous tax-wise, for policyholders to also be shareholders of a company in Bermuda.

He said, "But capital can always find a way around a hurdle or over a hill.

And one of the main solutions we found around this was taking the company public, which was never the intention in the beginning by the policy holders.

"But that was the solution to the tax problem and we were involved in the first IPO (Initial Public Offering) in 1991, that was quite like child-birth to get it through the SEC (US Securities and Exchange Commission) at that time.

"It was such a new feature on the scene, the large capital and large risks that accumulated. To get the SEC approval was certainly like giving birth. But having done that, the dam burst and it set a paradigm for a flood of capital to enter this market.

"One of the unintended and unexpected outcomes of that was that we had to first teach people like Goldman Sachs, Morgan Stanley, Merrill Lynch, J.P.

Morgan and DLJ (Donaldson Lufkin & Jenrette) what our business was all about, so that we could sell it to their institutional customers around the country.

And they learned pretty well. They're pretty smart and they have a real good idea of what we're doing here.

"And one of the outcomes of the next cycle, clearly, is inviting them to directly participate in whatever solutions will be brought to bear when that next cycle turns.'' Mr. O'Hara warned that history has shown how complacency has been the downfall of the mighty. He said, "Unfortunately, status quo thinking is still common.

As markets change, the established leaders are often among those most blinded by their past successes. In other words, those whom the gods would destroy, they send 20 years of good earnings.

"Of the 100 largest US companies in 1917, we count only 15 companies surviving today. Besides six oil companies, there are two automakers and seven others: AT&T, Citicorp, DuPont, General Electric, Kodak, Proctor & Gamble and Sears.

"The other 85 went bankrupt, were liquidated, were acquired or left behind.

And you know in our business, the process of change is moving at a faster and faster pace.'' He recounted how the Bermuda market emerged as a product of cycles in the insurance industry, starting with 1965 and Hurricane Betsy and the shrinkage in property capacity that started the trend of captives.

That trend continued faster in 1975 with the casualty crisis at the time, which led to the start of underwriting in this market -- an underwriting which ended up quite unsuccessfully in 1984, and was part of the crash of the general casualty capacity market in 1985/86 which led to the formation of ACE, EXEL and others. They were followed in 1992 by the property catastrophe reinsurers.

US tax reform proposals pose threat to Bermuda There have also been great examples of consolidation and concentration.

He said, "You have to be mammoth to compete. You have to offer a variety of products. You have to have a variety of distribution systems. You have to have access to great technology and resources.'' Examples for him included the Travelers Group and the recent Zurich Group/BAT Financial merger.

The needs of risk transfer buyers in the next millennium, then, must be understood in terms of customer demands for a new value proposition. The role of corporate risk management continues to evolve from managing traditional event risk, property and casualty, etc., largely addressed by buying annual insurance capacity, to a broader mandate of protecting earnings and shareholder value from all forms of enterprise risk; event, financial and business risk.

The role of the insurer and reinsurer is evolving from the selling of mono-line annual insurance capacity on generic forms to one of partnering with insureds to customise long term, holistic risk solutions tailored to a corporation's specific financial and business exposures.

Mr. O'Hara said, "This has led to multi-year contracts that are continuous, that may eventually have quarterly adjustments. In the financial markets, if you are buying currency, it is done on a quarterly basis. All we know is there is a need to be faster, not just longer, broader, more efficient and more effective. These multi-line coverages lead to portfolio pricing and greater leverage. The challenge is in integrating event risk with financial and business risk, and finding non-correlating risk pricing efficiencies, incremental risk transfer.

"In the future, in trying to address earnings per share protection, underwriting floors will resemble more like trading floors. And you will have a group of people around various screens, working to protect that next quarter's earnings per share.'' New knowledge-based systems will be created, based on new sets of risk data that will be correlated and put together. This may occur in Bermuda because of tax and accounting advantages that he hopes will still be here.

He said, "The nascent footholds of that approach are already being put in place here, with the recent Cat exchange and commodity futures exchange.

"At EXEL we are trying to meet the challenge. We have reorganised from a product line silo approach to customer business units, focusing on the customer and on industry groups to learn more about them, their cultures and the things that differentiate them from other industries and their competitors.'' He is inspired by CNA chairman, Dennis Chookaszian's view that: "The companies best poised to thrive are companies that are learning organisations.

These companies emphasise innovation in all their operations by encouraging learning at all levels. Insurance is becoming much more entrepreneurial and the winners will be organisations whose people never stop learning. Their knowledge and skills will unlock opportunities that other organisations don't even notice.

"What we have been doing lately in Bermuda, in our expansion in the US, London and elsewhere, is to provide ourselves and Bermudians a platform where we can learn more, get more research and development accomplished and get broader experience.

"And therefore, we, hopefully, will be able to meet these challenges that are being poised right in front of us.'' Brian O'Hara BUSINESS BUC CONFERENCE CON