Why Bermuda will remain central to risk transfer innovation

At the annual Bermuda Re+ILS Monte Carlo reinsurance/ILS roundtable in association with Markel, 10 senior executives from the industry debated the changing face of risk transfer and Bermuda’s central role in that process of change.

In attendance

Brad Adderley, partner, Appleby

Kathleen Faries, head of Bermuda, Tokio Millennium Re

Andre Perez, chief executive, Horseshoe Group

Jeremy Pinchin, chief executive, Hiscox Re

Kathleen Reardon, chief executive, Hamilton Re

Greg Reisner, assistant vice president, rating services, AM Best

Jed Rhoads, president & chief underwriting officer, Markel’s global reinsurance division

Charles Thresh, managing director, advisory, KPMG in Bermuda

Arthur Wightman, territory and insurance leader, PwC Bermuda

Greg Wojciechowski, chief executive, Bermuda Stock Exchange

As reinsurers strive to manage and understand the most intense period of change they have ever endured, Bermuda and its players remain well positioned to lead from the front and prosper as a result of future innovation—but they must also be wary of challenges and pitfalls ahead.

That was the overarching theme of the annual Bermuda Re+ILS Monte Carlo reinsurance/ILS roundtable in association with Markel, held yesterday (Monday September 12) in the Fairmont Hotel. Ten executives debated the challenges and opportunities currently facing the market.

Jed Rhoads, president & chief underwriting officer, Markel’s global reinsurance division, kicked things off by stressing that the lines between reinsurance and the capital markets are continuing to blur, but that most players have now adapted by leveraging other sources of capital in addition to their equity capital. He also said the industry was moving into new product lines but needed to innovate more.

Jeremy Pinchin, chief executive, Hiscox Re, agreed that Hiscox as a whole has been leveraging third party capital for some time through its fund Kiskadee Investment Management and said that he expects further growth in that field. He added that in the sector as a whole the gap between the price and the expected loss has shifted dramatically in recent years, and the risk of a big loss had increased as a result.

Other executives highlighted ways in which reinsurers can remain competitive in the face of such a prolonged period of low rates, which is exacerbated by the fact that so much third party capital is still entering the industry.

Kathleen Reardon, chief executive, Hamilton Re, said technology and better risk selection are the solution.

“We are a newer company and, as such, not restrained by legacy issues,” she said. “The industry has always used data analytics but the better use of that and better technology has to be the next step. Risk selection will trump price going forward.”

Kathleen Faries, head of Bermuda, Tokio Millennium Re, said that the speed of change in the industry is intensifying and argued that smaller, nimble players such as Tokio could thrive in such an environment. She highlighted the fact that the financial might and strong balance sheet of Tokio’s parent company gives it more flexibility to be agile.

“It means we can be more like a start-up. It could become more challenging for bigger reinsurers,” she said.

Andre Perez, chief executive, Horseshoe Group, agreed that the influx of alternative capital had changed the industry in fundamental ways. “The traditional model has been challenged and tested and is now changing as a result,” he said. “It is testing limits and changing mindsets but it makes for a very dynamic industry.”

Brad Adderley, partner at law firm Appleby, agreed and said the influx of new capital was only set to continue—despite the soft market—because the industry remains so attractive in comparison to other investments. He said a number of new platforms are likely to be formed this year, making competition for business even more intense. To avoid the competition in property-cat business, some of the new launches may target life, he said.

Greg Reisner, assistant vice president, rating services, AM Best, said it was important to distinguish between true insurance-linked securities (ILS), and collateralised reinsurance. He said the latter sector represents the bigger piece of the pie. It is still growing, and has the potential to continue to grow fast, he said.

Greg Wojciechowski, chief executive of the Bermuda Stock Exchange, said interest from investors in ILS has not waned and remains high. He said the challenge for the industry was to create new asset classes and products for this method of risk transfer.

He stressed that ILS deals complement the traditional sector and could play a part in helping close the exposure gap in some markets in the long term. He added that ILS investors were in this asset class for the long haul.

Plenty of capital

The discussion moved to the issue of how the industry could grow as a whole—especially given the high levels of capital in the industry. Arthur Wightman, territory and insurance leader–PwC Bermuda, said the industry had no choice but to try to source new risk, but admitted it can be a costly and time-consuming process.

“There are new products such as cyber and flood emerging but it is painfully slow. The flipside is that the industry has a massive opportunity if it can get this right. Only around 10 percent of all risk globally is insured, but it is also a complex challenge that requires investment,” he said.

Charles Thresh, managing director, advisory, KPMG in Bermuda, issued a cautionary note on the dangers of moving into new risks. He said the industry is continually being asked to do more or take on more risk for less premium or fees. “There are some reasons to be wary of new risks,” he said.

The participants went on to discuss Bermuda’s role in this new risk transfer landscape. They agreed that its location, talent and robust yet flexible regulatory regime mean it is uniquely placed to lead the industry towards a new and innovative future.

Rhoads had the final word on Bermuda’s future: “There is a danger we pat ourselves on the back too much but I do believe that Bermuda, because of its size and the proximity of market participants, has the wonderful ability to develop ideas and then share that knowledge in a way that results in a nice cocktail of innovation from which good things emerge.”