Q2: WHAT MIGHT BE THE OPPORTUNITIES FOR BERMUDA GOING FORWARD?
“Meaningful rate increases need to be secured.”
Simons: Without a doubt, if you’re thinking about starting a new enterprise in our space now, Bermuda is a good place to start it. From a regulatory perspective, from a talent perspective, from an ease of doing business perspective, Bermuda has it all.
Bermuda is open for business, compared with the US or London, where things remain in flux. The issues that are plaguing other jurisdictions are not plaguing us.
At AXA XL we’ve been able to move business around from the various platforms we have and we’re lucky we have the ability to do that. We can take advantage of that flexibility.
In terms of startups, it will be hard. They have to get the business, hire the talent, get the investors.
I have seen various cycles and I look at the landscape now and we need to get back to rate adequacy. That’s the focus for us. That’s what we’re driving towards, those are conversations we’re having with our clients. Meaningful rate increases need to be secured.
That’s one reason you haven’t seen the influx of capital and things haven’t come to fruition as quickly or as visibly as one might expect. The cost of capital has gone up, it hasn’t gone down, and investors in our space the last few years have been burned with capital from things that they weren’t aware of, or risks that wasn’t in anyone’s pricing.
“Another opportunity comes from the fact that Bermuda is a leader in the ILS space.”
These are teachable moments for all of us in the industry and how we handle it is important. Business is all about surprises, but we’re getting to an inflection point in the market around pricing, and around the attractiveness of our business. There are investors that have had capital on the shelf, so it’s a bit of wait and see.
Our focus as an industry and company is on profitability to ensure that we’re able to cover our clients’ existing and emerging risks. For probably four years on the run, it’s been difficult. I think that’s the same for all investors. We’re at a place now where investors are not ready to jump in with both feet.
Brown: We continue to believe that Bermuda is the best place to start a reinsurance business, and that’s equally true these days on the property/casualty and the life sides.
We have seen some exciting growth on the life side in recent times. But if you look at the hardening rate environments that are coming, there’s going to be tremendous opportunity.
Another opportunity comes from the fact that Bermuda is a leader in the ILS space. There’s going to be some opportunities for Bermuda in that space to address some of the risks coming out of the pandemic.
When you get to the question of ‘why Bermuda?’, it’s the reputation, it’s the fact that the BMA is open for business and that allows you to put capital to work quickly in the jurisdiction.
Obviously having Solvency II equivalence and a great reputation from a tax transparency perspective are key considerations. If you add all those up, that’s why you’re seeing all this capital coming in. New companies are forming, and for every one of them Bermuda is at the top of the list.
“Our pipeline is very strong. We are bullish and optimistic about the future.”
Seth: The key theme we’re seeing is around access to capital. The large corporates we work with are focused around how can they increase the utilisation of their captives; that’s an access point for them in terms of their capital.
We have also definitely have seen an increase of reinsurance purchasing, whether that is traditional rated paper or access to capital markets. Since July, we’ve seen an uptick in the number of cat bonds, mortgage insurance bonds and even traditional companies revisiting their third party capital strategies and looking to raise more third party capital.
That whole access to capital theme is going to continue, and when you look at some of the risk-adjusted returns for next year, when you allow for the hardening market and the assumptions around double-digit rate increases, whether it’s the retro market, certain areas of the reinsurance market, you are getting a favourable risk-adjusted return, particularly in this low interest rate environment.
Our pipeline is very strong. We are bullish and optimistic about the future. And where better to bring risk and capital together in an efficient manner than Bermuda? So, we continue to invest in our business across the board because we see that trend continuing.
“Future pandemics will be too large for the insurance sector to absorb.”
Huff: The future of the market plays to Bermuda’s strengths. We’ve established the safety of Bermuda, and Bermuda for the next 18 months is probably going to be the most stable environment in the world.
Think about what the UK is going through as it separates from the EU. There is a great deal of uncertainty in the UK. Then in the US, there is also a great deal of uncertainty with the election and what happens after that.
Then you have product lines of the future. Future pandemics will be too large for the insurance sector to absorb so by definition there has to be a public-private partnership between the insurance industry and governments.
Bermuda does business in 150 countries, we’ve developed those working relationships, and they will be so important to future pandemics.
Finally, there is also the issue of climate change. Natural catastrophes are our bread and butter, it’s our strength, as that translates into business. It will play to our strengths as well.
In terms of rate hardening, it’s about matching rate to risk. There are a variety of drivers for that but also I think COVID-19 will, by some estimations, be the largest insurance event in history.
“There is finally more resolve to get paid appropriately.”
Dunleavy: I see the pandemic as accelerating a change in the market that was already in process and was well overdue. If you get a 10 percent rate increase on a deal that is down 50 percent over the last five years, that’s not even remotely enough.
The real driver is not capital but the underlying health of the industry, which has been poor for a long time. Balance sheets might be strong but shareholder returns and performance have been poor.
Now, that gap between what management is saying and what underwriters are actually doing on the ground has dramatically narrowed. There is finally more resolve to get paid appropriately for the risk we are assuming.
I also think that third party capital will continue to play a strong role in the industry, but people will be more selective around where that capital goes. Some of the returns promised to investors as well as rate increases didn’t materialise.
In some ways I feel we are entering a market that is perhaps better than a hard market in the sense that it’s really about the fundamentals of the risks that you’re assuming.
There are perils such as wildfires we have not adequately priced for, you have worrying trends in casualty. I think we are looking at a multi-year market hardening, which is overdue and needed, frankly. People need strong reinsurance partners and poor results year after year doesn’t give that to them.
It’s an underwriter’s market. Hard markets tend to spike and then go away, whereas this is a real opportunity to get back to pricing levels that makes sense for the long term.
“The world is definitely a more volatile place.”
Seth: We are having a much broader risk conversation with our corporate clients. The world is definitely a more volatile place whether it’s pandemic, cyber, wildfire, geopolitical—and a lot of these risks are not even insurable.
So we’re having a much broader conversation around risk identification, risk mitigation, risk management, and then there is the risk transfer piece. It’s only one element of the boarder risk management conversation.
If you look at the values on clients’ balance sheets, particularly in the tech space, we’ve seen a huge acceleration of intangible value. We have developed a new intellectual property solution. We’ve just launched it, and we’ve chosen Bermuda to launch this line. It looks at how we can we find a risk transfer solution for intellectual property.
Post COVID-19 some industries such as the technology industry, the life sciences industry and companies that have a strong digital strategy will accelerate in their growth, whereas other industries such as hospitality, travel, and energy may struggle. They call it a K-shaped recovery.
For the companies that have accelerated, how do we bring relevant solutions to them with regard to risk transfer? How can we help those clients manage their risks?
“My sense is the psychology is changing.”
Simons: One thing I would add is that for all the work we’ve put into our business and pricing models and dashboards on pricing the one thing that has been missing is the psychology of rate change.
The underwriters dealing with brokers and clients day to day are highly talented and very motivated, but in some cases inexperienced.
We have a lot of very dynamic young people but maybe they haven’t experienced this sort of market. So it’s the psychology that comes along with it.
It’s important because often it comes down to an underwriter sitting in front of a broker, negotiating a deal. The C-suite might be pushing for rate hikes but still the underwriter has to execute on it. My sense is the psychology is changing, and I think it’s important.
Malloy: The key is uncertainty. Life is more uncertain now than a year ago. Mother Nature has thrown curve balls with increasing frequency. We also have social inflation, and the low interest rate environment on top of ongoing COVID-19 losses. Those are all big movers of the dial. So even if life is going to revert to normal, you would need to have more capital for uncertainty.
You mentioned intellectual property as an example of a new line of business. That’s a good example of what underwriters in Bermuda can achieve when they put their minds to a problem. We have grown comfortable with the risk and the price but absolutely need to factor in uncertainty.
For 10 years, the industry had no major cats. If you were property cat underwriter, you were successful, but also faced year-on-year rate reductions.
The same happened on casualty when there were no headline-grabbing lawsuits. Rates fell and now we are seeing a slow-motion car crash. I agree that now it’s an underwriter’s market again as a decade-long softening market turns around.
“It’s an underwriter’s market again as a decade-long softening market turns around.”
Brown: We see that the hardening market is here for probably several years, the environment has created it. There is no sign of the low interest rate environment changing.
We’ve got social inflation, the wildfires that were unexpected or unmodelled to a certain degree, and companies living off reserve redundancies. Those have perhaps lessened to a certain degree.
In the past, we might have seen bigger corrections before now and maybe alternative capital muted that.
Now, however, after the challenges of trapped capital a new dynamic has emerged that has allowed the market to harden even quicker than it might have a couple of years ago. I think this environment is here to stay, at least for the short term.
Adderley: From discussions with my clients, my view is that the hard market is here for a while, but I’m not an underwriter. It has been going down for so many years—you can’t continue to lose money plus with interest rates so low, the only way you can make your money back is through pure underwriting.
On the topic of ILS, at the beginning of the year a lot of cat bonds came to market even from new players, and more innovative deals with new products and new sponsors.
Some of them were delayed for a while but they all came back in July. We are also seeing a lot of collateralised reinsurance deals being done as well as some very big ILS funds.
New ILS funds are definitely coming to the market and that is good, plus they are choosing Bermuda. ILS is going to go from strength to strength.
“Traditional insurers and reinsurers are partnering with alternative capital.”
Brown: We are seeing a number of startups in the ILS space and I agree Bermuda is the leader there, which is certainly a positive thing.
We have an asset management side of our business that works well with the reinsurance side. But when we look at the alternative capital or ILS I’m seeing more teaming with traditional reinsurers, which may be the trend going forward.
Huff: We are seeing a flight to quality. Traditional insurers and reinsurers are partnering with alternative capital, so investors get the benefit of both: the rigour of the established carrier for terms of legal and compliance and modelling but also the opportunity to invest in a non-traditional way.
Dunleavy: I agree there has been a flight to quality around good managers and people who have taken appropriate reserving positions. There is definitely a higher bar in terms of what investors expect which may prolong the conversations around capital raises.
In turn, that could create more pressure around renewal discussions, because people won’t necessarily know what their final end of year capital will be.
A lot of clients want to go early, but people may not have that third party capital lined up. It’s a challenging market from all perspectives, but ultimately that creates opportunities.
“There is definitely a higher bar in terms of what investors expect.”
Seth: There’s going to be an important role for both the traditional reinsurance market and the ILS market coming into 1/1. Because of the increased demand for reinsurance or retro, if you’ve got that spare capital, you will have an opportunity to deploy it.
It’s a question of whether you feel rates are going to be adequate, whether the risk-adjusted return you’ll get is going to be appropriate. Both markets have an important role to play because the demand will be there.
Image courtesy of Shutterstock / Maciej Bledowski