No-brainer: Bermuda is the right place for climate risk finance

The Bermuda Business Development Agency (BDA) is confident it can execute on its vision to establish Bermuda as the world’s capital for climate risk finance, in part because of the Island’s three decades of expertise and track record in “the most adjacent vertical” of climate-driven reinsurance, says its chairman, Stephen Weinstein (pictured above right).

Weinstein and BDA chief executive officer David Hart (above left) spoke to Bermuda:Re+ILS during the Bermuda Risk Summit in March, during which many delegates referred to climate as having moved from single-event issues to a type of systemic risk.

“The roots of Bermuda’s re/insurance market date back to captives, but the roots of the modern re/insurance market date to Hurricane Andrew. There has been an emergence of climate-related risk management expertise here in Bermuda,” Weinstein said.

Bermuda is the best place in the world to capitalise, operate and domicile global business-to-business technical strategies, he said. “That’s a way to describe re/insurance. It’s also a way to describe this emerging vertical of climate finance. We have the credibility to reach out to investors and entrepreneurs in this space, in part because of our background in climate leadership in re/insurance.”

“It will take an all-hands-on-deck approach to apply climate risk mitigation at scale.”

Stephen Weinstein, BDA

The right foundation

On the policy and regulatory architecture needed to support climate risk finance, Hart said the good news is that Bermuda already has that infrastructure.

“Let’s start with the human talent in this six-block area in the city of Hamilton,” he said. “It’s phenomenal and it’s in the space of assessing risk. So there’s 30 years of expertise already built, with no new infrastructure needed.

“On the regulatory side, we’ve got the Bermuda Monetary Authority (BMA) as the sole financial services regulator. That’s unlike many other jurisdictions, such as the US which has local, state, federal and multiple federal agencies that want to be involved in regulating just about anything.

“Here, it’s very sophisticated, and quite speedy to market too, so it has some nice attributes for those looking at Bermuda as an opportunity.”

Asked whether those processes would transfer seamlessly to climate risk, Hart said “absolutely”, since the BMA already has a focus on environmental, social and corporate governance (ESG) and climate risks. “They’re building that strength as we speak to be able to accommodate moves in that direction by the market,” he added.

Weinstein said there’s a distinction between the explosive growth in the Bermuda market after Hurricane Andrew in the mid-1990s, when some of the world’s leading investors and capital allocators “took a leap of faith” that they could build upon the existing captive insurance infrastructure already here, and building out a robust global infrastructure for third-party reinsurance.

“The new generation of climate entrepreneurs will draft in the wake of the resulting three decades of investment,” he said. “There’s also an opportunity to bring in new things that suit these innovations. The BMA is open to apply what they’ve built to what’s clearly the most adjacent vertical, but they’re also open to refine and innovate new robust regulatory structures that will suit these new products.”

Smart competition

In terms of other potential centres of climate risk finance that would compete with Bermuda for that business, Hart and Weinstein said there was a greater need for collaboration on climate risk, than for rivalry.

Weinstein said: “The scale of the climate challenges that we all face is so immense, and the challenges are so holistic, that it will take an all-hands-on-deck approach to apply climate risk mitigation at scale, to support the transition, and to begin to bend the curve on climate risk.

“There’s plenty to do for everyone. That said, Bermuda is the best platform in the world for business-to-business, global financial services solutions. There are other jurisdictions that can be advantageous as well. Some of them are in different geographical regions but I think we stand alone with a set of unique characteristics that no other jurisdiction matches.”

Hart added that he’s an “enormous fan” of competition for its value in raising standards and spurring innovation. “I welcome those competitors and hopefully we’ll find breakthroughs together.”

To the suggestion that climate risk is possibly the only area where markets should be competing in a collaborative way, Weinstein said: “Bermuda has always succeeded in collaboration with partnerships. For example, at this Summit we celebrated our partnership with Florida, Florida’s business leaders, and Florida’s public policy apparatus in how we came together to solve the hurricane crisis, and how we’re working together now to solve this fraud crisis.

“The nature of Bermuda is that we always proceed in partnerships and that will be true on climate.”

Innovation pioneers

On the practical tools that provide climate risk finance, Weinstein referred to Kettle, which is building a reinsurance model for protecting today’s globalised world from the catastrophic effects of climate change.

“Kettle is pioneering sensors, technology and smart artificial intelligence-adaptive techniques to pioneer new risk management solutions,” he said. “As I understand their strategy, while their tech can apply to a range of climate trigger perils, their initial focus is wildfire. We’re very excited about their team and their spirit of innovation and expect them to grow over time.”

He also highlighted Blockchain Triangle, which is looking to apply blockchain and smart sensors to build out tradable markets around verifiable data, and is very focused on a series of climate-related risks and the resilience of risk investments.

“Blockchain Triangle’s proprietary technology can be applied to a range of techniques and solutions. Bermuda is a platform that will accommodate them and the BDA’s mission is to remind people, who may not think about us because they’re coming out of verticals that are not financing re/insurance, why our attributes are so attractive for their strategy,” he said.

On how the BDA can bring the public on board with Bermuda’s ambition to be the centre of climate risk finance, Hart said: “the world’s greatest challenge is also the world’s greatest opportunity”.

“I’ve done media interviews, and talks with young people who have a great passion for environmental conservation, which Bermuda has been leading on for 400 years. Bermuda had the first-ever piece of legislation passed in the western world to protect an endangered species, for sea turtles in the early 1600s. It’s quite an impressive history of support in that area.

“Young people here, like young people everywhere, have a passion for conservation. I’ll often tell them that Bermuda has a unique opportunity. Take those passions you have, and plug them into preparing yourself for a career in this field.

“We’ll do our part; we’ll make some opportunities happen here. And you merge the passion with the new ground that’s being broken.”

Mitigation is key

On how climate risk finance can address not merely the damage caused by an extreme weather event, but also mitigation of the effects of climate change, Hart referred to his home state of Florida, which is surrounded by coastline on three sides.

“We have to invest in resilience along the coastline to protect property, people and the quality of life and nature that exists there and here in Bermuda. I’ve watched as investments have been made to have stronger building codes, for example, which we’ve done in Florida; to invest in raising the level of streets, sidewalks, roads, railways, so there is a resilience should the models prove to be correct, and we see sea levels rise,” he said.

Weinstein gave two examples of the role re/insurance can play in that process.

“Re/insurance is inherently adaptive when permitted to function properly, when scientifically-led reinsurance pricing is allowed to operate at market-based pricing and indicate where there’s real hazard, where there’s been the benefits of adaptation. That sends a very strong pro-adaptive signal,” he said.

“Looking at Bermuda, we have an opportunity not just to continue to grow upon and expand on our half-century of leadership in providing risk solutions, but to promote climate finance solutions.

“As David has said, the flipside of challenge is opportunity. Bermuda is the best place in the world to capitalise B2B financial services solutions. Over time, we envision a Bermuda climate finance vertical that may be broader and more diversified than the re/insurance vertical.

“It’ll be slower to develop, partly because it’s more diverse, but the end game will be a more diverse set of companies themed around climate, providing a broader range of job opportunities for Bermudans, and a broader range of opportunities for people to invest in. It’ll be exciting.”

Getting there from here

The timeline for building Bermuda’s role in climate risk finance will look different from the way it has developed markets before, Weinstein said.

“The timeline will differ, as we stand up this new vertical, from what we’ve seen in the ways of company formation that have characterised Bermuda market cycles in the past. The re/insurance market has moved forward following disruptive events: Hurricane Andrew, 9/11, and hurricanes Katrina, Rita, Wilma in the US southeast.

“To respond to a clear market need at a definitive point in the market in time for renewal season, a wave of capital formations tends to come to Bermuda and the dust is cleared. But those cycles end as the market adjusts to the new capital.

“The growth of the climate vertical that we envision will play out differently, as we carry our message to people who aren’t aware that their strategies would benefit from our platform.

“The strategies tend to be diversified and have their own market timing needs and timeframes. In my estimation the buildout of the sector will take years, not quarters, and we must have the vision and stay persistent to tell our story, but it will come.”

As to what can be done to encourage companies to be on the right side of the ESG obligation, Weinstein said the Bermuda market already had a “great story to tell”.

“The way I would phrase our challenge is that we can benefit from encouraging our friends in the Bermuda market to tell their ESG story. In general, their ESG story is a great one, but we’re all along a journey and they are each at different points in the longer ESG trip.

“But in general our market is characterised by tremendous ESG leadership. The ‘E’, the environmental leadership, in Bermuda dates back four centuries. If you are licensed in Bermuda, and you accept and operate by our blue-chip standards, then you will outrank most of the world on the ‘G’, which is governance, because we are blue chip, exceeding the world standards for compliance and transparency, and requiring very high levels of corporate governance and regulatory oversight,” he explained.

“And on ‘S’, if you invest in Bermuda, as I have been grateful to do for three decades, your returns will be high, because the human capital here is so terrific. It’s very likely that the diversity, equality and inclusion scores will also improve.

“We need to encourage companies that are by their culture quite humble, to be willing to share their narrative in public,” Weinstein concluded.

To find out more visit bda.bm/events/bermuda-climate-summit-2022