Reinsurers stand up well to BMA stress test

  • Resilience proved: Bermudian reinsurers performed well in a stress test whose scenarios included three major US hurricanes at the same time as an insurance asset shock

    Resilience proved: Bermudian reinsurers performed well in a stress test whose scenarios included three major US hurricanes at the same time as an insurance asset shock


Nine Bermuda reinsurers hit with a number of high catastrophe-loss scenarios would be able to meet all their obligations, a stress test by financial regulators found.

Tests conducted jointly by the Bermuda Monetary Authority and Britain’s Prudential Regulatory Authority last year also showed the importance of the island’s insurance-linked securities market in maintaining the market’s stability.

In its report, the BMA noted that it was keeping a close eye on the potential impact of Covid-19 on the market.

The test involved four different natural catastrophe scenarios and an insurance asset shock, in which the value of investment portfolios would plunge.

The disaster scenarios were three US hurricanes, a California earthquake and aftershock, a Japanese earthquake with tsunami, and a British windstorm, storm surge and flood.

The nine large Bermuda reinsurers tested, all Class 4 or Class 3B, had about $35 billion of capital and surplus between them.

The BMA noted that the group showed resilience to all scenarios and “healthy capitalisation”.

The regulator added: “All insurers would be able to meet their obligations, under the most material scenario [insurance asset shock, plus set of three US hurricanes].”

One of the reasons for their resilience is that they cede much of the risk.

In the three-hurricane scenario, causing a market loss of $181 billion, the test found that the nine tested reinsurers would be hit with gross losses of $13.1 billion. However, net losses would be just $3.2 billion, as 76 per cent of risk was ceded under this scenario, including 34 per cent to Bermuda collateralised structures such as ILS.

The major role of the ILS market in reinsuring major loss events is made clear by the test, which showed that 44 per cent of reinsurance recoveries in the triple-hurricane scenario would come from Bermudian collateralised structures, and around a third for the California earthquake, Japanese earthquake and UK windstorm scenarios.

About 85 per cent of the world’s outstanding ILS capacity was listed on the Bermuda Stock Exchange, according to the risk transfer website Artemis.bm.

The London market is also relies heavily on reinsurance coverage from Bermuda. The PRA’s report notes that Bermuda’s reinsurers are “sufficiently capitalised, and significantly rely on reinsurance and specifically collateralised arrangements”.

ILS investors put up capital for a limited time to cover specific perils and receive a return, but stand to lose some of all of their money if the peril occurs.

The BMA explained the strength of such instruments within the Bermuda market.

“The majority of the collateralised recoveries are backed by cash or cash-equivalent types of assets, which highlights that market or liquidity risk is remote under these collateral arrangements,” the BMA stated.

“The results highlight the critical role fully collateralised vehicles have in offering reinsurance capacity. One of the key benefits for cedents using fully collateralised vehicles is the minimisation of credit risk that is typically observed in traditional reinsurance arrangements.”

Covid-19 has been “elevated to be a central focus of our supervisory efforts”, the BMA said, adding that an assessment of the pandemic’s impact on the Bermuda market was under way.

A separate BMA report gives insight into the Bermuda market’s role in covering global catastrophes. It found that over the past three years, the island’s reinsurers paid out $9.2 billion in gross claims arising from California wildfires and $9.6 billion related to Japanese typhoons.

to view the BMA stress test report and the wildfire and typhoon survey, click on the PDF link under “Related Media”

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Published Jun 26, 2020 at 8:00 am (Updated Jun 26, 2020 at 8:00 am)

Reinsurers stand up well to BMA stress test

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