Reinsurance and a hard road ahead
Bermuda’s reinsurers are facing European renewals and looking for real rate improvement in the year ahead after several years of increased catastrophe activity, significant losses and no opportunity to meet and exceed their cost of capital.
And after years of the insurance-linked securities business being focused primarily in property catastrophe, ILS is slowly expanding into other areas.
Appleby senior associate Josephine Noddings said that reinsurers are rethinking how they structure business to deliver profits to investors.
She was part of a panel of Bermuda executives debating rates, capacity, start-ups and climate change during a reinsurance round table established by Bermuda Finance 2021/22.
She pointed to innovation in the ESG (environmental, social and governance) sector, especially around certain technologies such as blockchain, that can be used to develop tools such as smart contracts.
She added: “A further step could be capital being tokenised.
“All those concepts are going to come into play over the next few years as those technologies are embraced and encompassed to streamline the risk chain for all users.
”The BMA [Bermuda Monetary Authority] is at the forefront of all this. They embrace the future in the way they regulate their entities.“
The panel broadly agreed that even with rate increases, reinsurers were still a distance away from adequate pricing for the risks they were assuming.
Christian Dunleavy, chief executive officer of Aspen Bermuda, was considering European business when he said: “For the past ten years, people [reinsurers] have given up 5 per cent of their rate every year. So if rates increased by 10 per cent, it’s insignificant. There has to be significant repricing in certain markets.
“When you give up 5 per cent for a decade-plus, you’ve cut your pricing more than in half. And it’s terrible news. The European floods should not have caused the kind of impact that they did from an earnings perspective. In Europe, there’s just not enough rate. It’s very simple.”
Aon Bermuda managing director Anup Seth said that the year of pure cat losses should include a similar total to 2020 of about $100 billion.
“But the frequency of the severe losses is very different,” he said.
“Last year, we had a huge number of smaller losses [between $1 billion and $5 billion]; Hurricane Laura was the only one that touched around the $10 billion mark. However, this year we’ve had three huge losses.
“The way that impacts the retro market is very different. This year we’re seeing many retro programmes being impacted, both occurrence and aggregate contracts. Therefore, we expect a significant reduction in retro capacity coming to one in 2022. We also need to factor in the trapped collateral.
“However, we have also seen very active cat bond and mortgage insurance bond markets. We do expect that trend to continue into next year.”
Meanwhile, PwC Bermuda reinsurance partner Matt Britten stated: “The market has handled the operational and financial challenges of the pandemic admirably. The market is still well capitalised despite four to five years of significant losses.
“However, as a result, reinsurers are struggling to deliver risk-adjusted returns. And that is problematic.“
Association of Bermuda Insurers and Reinsurers chief executive officer John Huff said: “The top-line conversation is around climate change and what it might mean for our industry.
“After some of the results we have seen, it will be interesting to see if some companies limit how much capital they deploy in the cat space and what that means for the market.”
AXA XL head of property, global markets and head of Bermuda reinsurance Paul Simons noted: “The frequency and intensity of cat events have increased.
“As a result, profitability in this line has been hampered. Reinsurers are at an inflection point right now.
“The dynamic is evolving but we see this as a chance to continue to differentiate ourselves as a market offering leadership to clients and brokers.”
Contributions to the discussion from Adam Champion, EVP, capital markets and reinsurance, Ed Broking Capital Advisors, included: “The Bermuda regulatory environment continues to innovate and we should give a nod to the digital asset space.
“We’ve reached the point where genuine progress has been made, and there are some interesting companies in the BMA sandbox.
“I fully expect that there will be Bermuda-based insurance transactions on a digital-asset basis as early as 2022.”
Mr Dunleavy said: “Even though a significant amount of rate has flowed in across several classes, results have yet to materialise.
“You could argue that we’re approaching hard market rates, but you’ve not seen hard market results yet. That will keep a floor under pricing conditions.
“But there is a lot of uncertainty. From my perspective, this means that we will continue to be in a relatively strong underwriting environment for the next couple of years.”
Mr Simons added: “Margins and returns both need to improve.
“For a long time, property cat was the business that kept a lot of reinsurers afloat but this is no longer the case.
“We need to reconsider how we evaluate risk. The calibration of models is very much in focus, particularly considering the impact of climate change.”
He also emphasised the need for the industry to innovate around younger talent, with a large number of senior executives on the verge of retirement.
Aon Bermuda managing director Anup Seth also discussed a future for legacy cat portfolios.
He said: “That’s interesting, almost like a non-Lloyd’s reinsurance to close [RITC] partnership that they could set up with an ILS fund or other markets here in Bermuda. Watch this space.
“We also should not forget the innovation on the life side. We continue to see asset-intensive life companies coming to Bermuda for all the reasons we mentioned earlier. And we are also seeing some longtail sidecars coming to Bermuda, casualty sidecars. That’s an exciting development on the island as well.
“It shows how the ILS industry is innovating and diversifying. These are some of the examples of innovation that we’re seeing.”
Mr Huff also said that the most fertile ground for innovation is a move from peril to protection.
He said: “Real innovation will come when we start thinking holistically about how we add protection and not merely indemnification.
“There are some great examples in the cyber market. People are not buying cyber coverage. They’re buying cyber protection. They’re buying a whole suite of products around how to deal with the breach and how to improve your hardware and software within your systems.
“That’s where the innovation will come from.”