Bermuda’s reinsurance sector has been stress-tested on its ability to withstand losses from a number of disaster scenarios — and it came through with flying colours.

The Bermuda Monetary Authority, the island’s financial-services regulator, this week published its first “Catastrophe Risk in Bermuda” report.

The report concludes that “the Bermuda insurance market is resilient to potential adverse impacts from various catastrophe underwriting loss scenarios”, and adds: “The results also establish Bermuda insurers’ ability to absorb these unlikely potential large losses and still have capital remaining to settle policyholder obligations.”

The report is intended to provide a high-level overview of Bermuda’s catastrophe reinsurance risk stress testing and modelling practices.

Bermuda has long been a catastrophe reinsurance hub, an industry which took off with a wave of new reinsurers that set up on the island after losses from Hurricane Andrew bankrupted 11 American insurance companies.

The industry has evolved over the years and most of the formerly monoline catastrophe reinsurers have either been acquired or have expanded into other lines of reinsurance and insurance, which has diversified their risk.

The BMA report, which focuses on 2015 data, found that Bermuda reinsurers are more exposed to Atlantic hurricane risk than any other risk, with gross median exposures across all companies of $417.8 million for a one-in-50-year event and $771 million for a one-in-1,000-year event.

Reinsurers use computer models to simulate the loss impact of various catastrophe scenarios, most frequently with software provided by industry leaders AIR and RMS, sometimes used in tandem with Equecat, according to the report.

In-house modelling is used by 39 per cent of reinsurers — up from 34.7 per cent in 2011 — while more than half said they used more than one model in their accumulation process.

The report uses data from Class 3B and Class 4 insurers only. The stress tests involved each firm estimating its loss impact for 18 standardised underwriting loss scenarios, using Realistic Disaster Scenarios developed by Lloyd’s of London and other scenarios developed by the BMA.

Each insurer also has to provide its own estimates for a worst-case loss scenario.

Of the 18 scenarios, the report stated “Gulf Windstorm (onshore) had the largest potential adverse effect with an estimated gross loss impact to statutory capital and surplus of 24 per cent (and 12 per cent net loss impact), followed by Northeast Hurricane, which had the potential to deplete 23 per cent (and 13 per cent net loss impact)”. The gross impact from all other perils was below 20 per cent.

The scenarios include California earthquakes, European windstorms, Australian wildfires and marine collisions.

“At the individual entity level, the results showed that Bermuda’s insurance entities are resilient to their worst catastrophe event underwriting loss scenario,” the report states.

The test also gauges terrorism coverage resilience, using a standardised scenario of a two-tonne bomb exploding. All firms tested “would comfortably withstand their worst impact” from this scenario.

The underwriting loss scenarios guidelines included a Miami-Dade hurricane causing industry losses of $125 billion, a Gulf windstorm costing $107 billion and a $78 billion Los Angeles earthquake.

The full BMA report is attached on this webpage under the ‘Related Media’ heading.