Time to shine after the storms have passed
The important role of Bermuda in the aftermath of potentially big losses stemming from hurricanes Harvey and Irma was centre of the debate at the annual Bermuda:Re+ILS Monte Carlo Roundtable sponsored by Markel Global Reinsurance and attended by 11 senior industry executives from all parts of the risk transfer industry on the Island.
Bermuda has the potential to shine in the aftermath of the losses stemming from the hurricanes that have hit the US in the way its reinsurers help clients and pay claims. These losses may also trigger opportunities around further closing the protection gap, something in which Bermuda has the ability to play a central role.
The overall reaction of the market in terms of how pricing and capacity may respond is much harder to determine, however, especially in the context of so much alternative capacity now operating in the market from investors who may not have experienced heavy losses of this nature before.
Those were some of the conclusions of the annual Bermuda:Re+ILS Monte Carlo Roundtable held yesterday (Monday September 11) at the Fairmont Hotel in Monte Carlo and attended by 11 senior executives representing different parts of the industry.
Jed Rhoads, president and chief underwriting officer, Markel Global Reinsurance, kicked off proceedings by reminding the room to hope and pray for the individuals caught up in the storms. He said that he believes the Bermuda Market, as the single largest catastrophe reinsurance market in the world, is uniquely qualified to respond and provide capital in the aftermath of such losses.
“The market has a very strong capital base and the experience to manage these risks. We also have a great regulatory regime, giving us a strong position to offer leadership to the industry.
“It is too early to speculate about the size of losses but we should not forget that we are only at the start of the hurricane season. There could be other events still to follow,” Rhoads said.
Mark Berry, head of specialty reinsurance, XL Catlin Bermuda, said that this was the time at which the industry should “shine” and make good on its promise to pay. He noted that Bermuda’s history as a market has been defined by its ability to respond and deploy capital in the aftermath of large losses and, he said, it remains well positioned to do the same thing again.
Stephen Ruoff, chief executive, Tokio Millennium Re, agreed, noting that the industry is undergoing a big change in the way capital can enter and operate in the market, with Bermuda playing a central role in facilitating structures that allow alternative capital to enter the market. He said that some investors could be “rattled” by sizable losses but he also had no doubt that the Bermuda Market would remain solid and may even end up more robust as a result of what is learned from these recent catastrophes.
John Warwick, managing director and partner, ILS Capital Management, reminded the room that the core business of re/insurers is to pay losses and the Bermuda Market has always delivered on this front. In terms of the reaction of the market, Warwick said much depends on whether the losses will be an earnings loss or a capital loss and, if the latter, whether investors will be willing to “re-boot” their investments straight away.
He said based on initial conversations with investors in recent weeks, that his sense is that many investors have almost been waiting for conditions in the market to change to allocate more funds to the sector. On this basis, there will certainly be no shortage of capacity. But he warned that while there may be a positive uptick on rates in the US market, this would not necessarily transfer to other markets such as the UK.
Addressing the protection gap
Brad Kading, executive director, Association of Bermuda Insurers and Reinsurers (ABIR), said he believed the industry should see hurricanes Harvey and Irma as an opportunity to educate politicians on the value of the reinsurance product supplied by Bermuda. He said that paying claims fast, thus aiding reconstruction efforts, and educating policymakers about risk and risk transfer, will go towards achieving this.
Leila Madeiros, deputy director, ABIR, added that the storms could represent a consensus on the nature of risk and risk transfer—what it truly means and how the claims process works. This could lead to the opportunity to better educate people about risk and help close the protection gap.
Bill Dubinsky, managing director and head of ILS, Willis Towers Watson Securities, reminded the room that the industry now has vastly better analytical tools and technical ability available to help understand such disasters than in the past. But it was a question of addressing the “disaster gap” and matching capital with the need.
Like Warwick, Dubinsky said the investors he had spoken to were ready to reinvest in the market and he even had some potential new investors interested in the space should pricing change. He added that there are now so many mechanisms available that allow capital to be put to work that capital would be able to enter the industry quickly and efficiently.
Can a hard market happen?
This led to a debate about the extent to which this phenomenon of capital being able to enter the industry so quickly could dampen any possible spikes in pricing in the aftermath of large losses—the hard market conditions which reinsurers have always enjoyed on a cyclical basis.
Brad Adderley, partner in the corporate department, Appleby, asked if this could stop true hard markets ever recurring.
“The money can come in so quickly now compared with 15 years ago—will we ever see a hard market created again now that capital can be replenished so quickly?”
Mark Allitt, director, KPMG on Bermuda, described the ability of capital to enter the market so rapidly as being “like a tap” which would mean the market would be better able to rebound from big loses more efficiently and quickly than in the past.
Kading made the point that, even if dynamics in the industry meant that rates could harden, policymakers in the US may not allow that to happen. He said that the instinct of policymakers could be to offer more support to ensure citizens are insured, rather than to accept rates increases after such losses.
Rhoads pointed out that this desire could be stymied by a lack of available funds from governments at the moment, although Adderley added that states could use their tax-raising powers to fund such initiatives.
Greg Reisner, director, AM Best, was asked how the ability of new capital to enter the industry so quickly influenced the rating agency’s outlook on the sector. He noted that AM Best has had a negative outlook on the reinsurance industry since 2014 due to concerns over rate adequacy and returns.
He added that he feels Bermuda is well capitalised to respond to big losses, but that only time would tell whether this flow of capital would check the cyclical nature of the market.
Structural challenges
Ruoff brought the discussion back to the protection gap, arguing that the industry must explore ways of ensuring that a higher percentage of losses are insured while also becoming more efficient as an industry.
Arthur Wightman, territory leader and partner for PwC Bermuda, agreed that the industry must tackle of some its structural challenges head on and look to tackle new risks. He said the concentration of intellectual capital on Bermuda made the Island ideally placed to lead the way on this.
Allitt added that this would be a great opportunity for the industry if it could find ways of tackling new risks such as cyber while leveraging some of the new technologies entering the market through the insurtech revolution.
“But the real challenge is picking the right technology to back,” he said.
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