Part six: continuing Bermuda Insurance Monthly Series – last Saturday of each month

The business of risk management and insurance encompasses millions of decisions, strategies, analyses, probability outcomes, the entire range of geography, all commerce, undersea to stratosphere, health, welfare, and life itself.

It is a rigorously demanding profession. Insurance expertise required runs the entire gamut of every singular broad profession: law, mathematics, accounting and auditing, engineering, investing and economics, human behavioural theory and psychology, crops and climate, medicine and its peripherals, safety and policing stability, war and terrorism, nuclear and cybersecurity, government and politics, and just about everything in between – way too numerous to detail.

Why? Because everything listed and more requires risk management, insurance, and loss protection.

Some basic tenets, there are many, many more not listed, applicable to insurance coverage ability, whether a commercial or self-funded organisation:

• Law of large numbers

• Collective risk spread

• Economic feasibility

• Competitive pricing

• Adequate capital reserves

The law of large numbers allows probability theory to estimate the frequency of certain events with reasonable accuracy; the larger the number (or population), the greater the accuracy.

Collective risk spread is an enigmatic description for assessing a large group with a range of low-to-high probability of insurance claims coverage, e.g. younger healthier individuals versus older, tending towards ill health older individuals.

Economic feasibility – straightforward assessment of whether a risk is insurable, and if so, whether the cost will be efficient for both the marketplace and the insurer.

Competitive pricing, in the insurance vernacular, a hard market will drive policy pricing up, while a soft market, intensely competitive for various reasons, tends towards low, sometimes precariously so, according to industry pundits.

Adequate capital reserves. A highly-organised long-tailed existing insurance company or a new start-up must have starter built-up capital to carry through first few years of operations.

Here is classic tale of an insurance Black Swan event, if you will, illustrated in a partially-hypothetical story of a self-funded insurance pool situation.

It was a 2,000-member companies’ trade organisation – each company employed an average of ten employees, each being provided some form of health insurance, generally, just a single rate coverage.

The owners were feeling the pinch of rising health costs – faster than inflation. In addition, they were responsible for workers' compensation insurance, unemployment insurance and payroll taxes. The employee overhead cost to pricing job contracts had increased to 150 per cent of straight labour.

The general perception (in discussions on controlling competitive job costs) grew that the members felt health insurance companies were overpricing their rates; after all, more than 50 per cent of their labour were young, generally healthy men – who often didn’t want medical treatment, even if necessary.

So, essentially, the owners felt they were funding older and less healthy workers in the larger overall jurisdiction insurance health pool. The feeling was – why provide a free insurance ride for these for-profit companies, when with planning, the organisation could establish their own self- funded health insurance pool?

There is a lot more. Stay tuned to next month’s tale ending.

Excerpts from Held Captive: The History of International Insurance in Bermuda by Catherine R Duffy, country head of AIG Bermuda.

In 1930, Bermuda’s first radio station launched while The Bermudian magazine published for the first time. The local economy, reaping revenue benefits from its exports of Bermuda onions and Easter lilies, was dealt a severe blow when the United States legislated tariffs on agricultural produce virtually wiping out what little was left of our island’s agrarian economy.

By 1934, Henry Tucker, a white Bermudian, having had a successful stockbroker career in the United States, his employer now bankrupt due to the crippling effects of the market crash and Great Depression, decided to return home to an executive position at Bank of Bermuda.

Tucker was an extraordinary visionary; realising that Bermuda’s agriculture export revenue had irreversibly vanished and that tourism, now the sole income producer might also be adversely affected, he instinctively knew that Bermuda could become an important world financial centre because of its location, its stable government, and its solid infrastructure.

Taking the motto of Bermuda as his guide, “Quo Fata Ferunt” – Whither the Fates May Lead, and pulling from resources that were available on the island, he set off on a marketing tour to sell the benefits of Bermuda to investors overseas. He travelled the world. Literally and numerously, promoting the virtues that Bermuda had to offer. Sir Henry Tucker was later called “The Father of International Business in Bermuda” and because of his unremitting work for Bermuda’s economic future received a knighthood in 1972.

Bermuda was making itself known on the international map. Imperial Airways, later to be known as first BOAC, then British Airways, started the first regular commercial airline service between Bermuda and Port Washington.

It was an opportune time.

Most parts of the world were suffering a deficit balance of trade. However, Bermuda was showing a positive balance, presenting potential investors with a very good incentive to put money into Bermuda. Tucker capitalised on that fact and on every other favourable characteristic of his island home while using his worldwide connections to bring the first exempted company to Bermuda.

Legislation in Bermuda had already transpired far earlier with the Companies Act of 1923 that stipulated that not more than two-fifths of shares in a Bermuda company could be held other than by British subjects, while permitted companies had to register and record the nationality of each shareholder, a beneficial ownership regulation now in existence for almost one hundred years.

Particular provisions of the Companies Act incorporating offshore companies exempted them from the 40 per cent share requirement; thus, exempted company terminology came into being with their activities restricted to off island ventures. Further, all exempted company banking business was to be transacted through Bermuda’s two major banks, while commercial banking of their own was strictly forbidden.

• Martha Harris Myron, CPA JSM, a native Bermudian, is a former qualified international cross-border financial planner, and the author of The Bermuda Islander Financial Planning Primers, international financial consultant to the Olderhood Group Bermuda Ltdl, and financial columnist to The Royal Gazette. All proceeds from these articles are donated by The Royal Gazette to the Salvation Army, Bermuda. Contact: martha@pondstraddler.com