In a recent column, I wrote about what is happening in the global property insurance market. To find out if the Bermuda property insurers are experiencing the same problems, I spoke to a local senior property underwriter to get his opinion.

This underwriter told me that the Bermuda property insurance market is intrinsically linked to the global property markets and therefore is not isolated from what happens outside of the Island. He has seen a dramatic increase in appetite for risk and capacity by large purchasers of insurance. Energy clients have been purchasing policy limits approaching US$3 billion, a record as far as the underwriter is concerned.

He says the Bermuda market is also very unique because it is a first time property market with a significant block of capacity with no legacy, coupled with excellent ratings from the rating agencies. Therefore, it is in very good standing compared to some of its counterparts around the world. Unfortunately the European market, which has traditionally invested in equities, is teetering on bankruptcy, which is leading a lot of clients to the Bermuda market with its strong ratings and conservative investment portfolios. The underwriter feels clients are seeking companies in Bermuda because of the strength of their paper.

This underwriter says because Bermuda started out as an excess casualty market, it has taken the brokers quite some time to realise that the Bermuda market has grown beyond its original monoline business to a larger viable property market. One of the strongest brokers he has on the property side is Marsh & McLennan. Several of the new companies, which set up on the Island post 9-11, are now actively looking to build up their property underwriting teams which will make Bermuda an even bigger property market.

The underwriter said the rates, terms, and conditions in terms of deductibles have never been better for the property market. The results for 2002 were better than any he has seen in his long career as a property underwriter. He said if underwriters did not write profitable business in 2002 then they lost a tremendous opportunity because 2002 was the lightest catastrophe year on record as well as the lightest industry loss year ever. There were no catastrophe losses on the chemical, power generation or petroleum industries per se (there were some losses but none that he would rate as catastrophic). The aforementioned industry groups are three of the toughest industry groups to underwrite because of their inherent catastrophic exposures. In addition, there were no US$100-US$500 million losses. He says sure there were some losses but not in the multiples that the industry is used to experiencing. Therefore, it was because of this phenomenal year of no losses that underwriting results were exemplary as underwriters were able to get the firm rates and good deductibles they were comfortable writing.

The exceptional results of 2002 also causes the underwriter some concern because he feels that more insurers will enter the property industry thereby creating an oversupply of capacity which in turn means increased competition. And when there is increased competition, underwriters have to lower their rates, and expand their terms and conditions to attract or retain policyholders in order to maintain their market-share. 2003 and beyond will be very interesting for property underwriters.

Terrorism does not seem to be too much of a worry on the property side as I originally thought because this underwriter feels that the terrorists got lucky and caught everyone off guard. But now that the unexpected has happened, clients are much more aware of the risks their businesses face and are taking the appropriate steps to minimise the effects of future terrorist attacks. The underwriter does believe there will be other attacks but not on the scale of 9-11.

He also said many underwriters in the Bermuda market have chosen to follow their lead markets as far as providing terrorism coverage, i.e. if a client comes to them with terrorism coverage beneath them, then they will continue to provide it in their layers albeit at their own terms and conditions. He said his company made the commercial decision to provide terrorism coverage even though they are not obligated to do so to provide continuity for their client base.

As far as where rates are heading for the property market, the underwriter stated he does anticipate downward pressure on rates for several reasons:

Increased capacity coming from more investments in insurance companies due to poor returns in the equity market

Increased broker competition as a result of brokers trying to match the phenomenal results they experienced in 2002 because competition between them was restricted as a result of excellent income results and the difficulty of placing business in 2002.

However, he says rates could also stabilise at the current very favourable range should the European markets begin to be seriously downgraded by analysts fearing they are too undercapitalised to continue to operate profitably.

There is also a lot of property capacity in Bermuda right now because Bermuda is the only place in the world where investors are getting a good return on their money. The equity markets have not yet recovered and it is unlikely that they will be able to do so until a decision is made about the pending war. Investors are still able to earn a healthy 8-10% return on their insurance investments and therefore are constantly looking for ways to invest more into the insurance industry.

The underwriter also said that realistically, it will probably be very difficult to replicate the results of 2002 because unfortunately underwriters cannot control Mother Nature and neither can they control human error, which is usually the cause of many of the mega catastrophes. Bermuda is the best place to be in this type of market because of the clean slate it has as far as loss history and it has very strong ratings. How long it will last is beyond him because of forces outside of his control. However, while the market is at its best as far as rates, terms and conditions, are concerned, he intends to continue to enjoy his job as a property underwriter in Bermuda.

@EDITRULE:

Cathy Duffy is a Chartered Property Casualty Underwriter (CPCU) and is now a freelance writer. She is a former executive of Zurich Global Energy and has 15 years experience in the insurance industry. She writes on insurance issues in The Royal Gazette every Monday. Feedback crduffycwbda.bm