Bermuda’s role in a hard market

Is Bermuda heading for a hard market?

Christian Dunleavy: It might be tipping into a hard market. The June/July renewal was the first time we saw some cedants unable to get capacity, so maybe it is on the cusp. Historical rates are the wrong reference point, however, because the profile of risk has changed dramatically and investors have become much more averse to cat risk. That is partly because of climate change and partly due to poor results.

Peter Bell: The market has hardened on the property side and we will go into the 1/1 renewal harder than we were or as a true hard market. Capacity is flat, or even down a little, and that will create an issue. It is more likely that rates will approach what they were in 2011, but not yet 2006, when cat rates peaked.

David Govrin: Investors are saying: you’re not getting adequate rate, share prices are down, book values are down. There’s too much volatility and not enough return.

Brad Adderley: Returns have been bad for the last couple of years and so what is it now, that is tipping us into the point of 2011 levels?

Govrin: The market has had five years of not making money on property-cat globally, which is meant to be one of the more profitable lines.

Dunleavy: There have been no major events and, in the grand scheme of things, it’s been about smaller, poorly modelled or unmodelled perils. The view of risk has changed dramatically.

Adderley: Normally you’d have a massive loss or a massive gain and almost everyone going crazy. But here in Monte Carlo, every year for the eight years before COVID-19, you heard about rates going down with no return then either.

Govrin: Historically, if the industry was hit by a $15 billion loss, it would have been a major wind or earthquake event. But most of the losses borne by the market in the past five years have come from under-modelled secondary perils—as opposed to modelled primary perils—which are not adequately priced into contracts. This volatility without the headline event has caused uncertainty among investors.

Brian Schneider: Investors are demanding more. They’ve been told for so long that “Diversification is going to work out great for you”, but they just keep losing money. What they’re expecting every year is not being modelled properly.

Govrin: There’s too much volatility and no return. It’s pretty basic.

Trevor Carvey: An underlying issue for the sector has been offering broader coverage in the past five to seven years. Some policies were designed as a catch-all but the world has changed. I am not sure we are at the point yet where policies respond only to named perils but it might be an increasing area for discussion this renewal.

John Huff: Insurance supervisors are concerned about accessibility and that is a pivot point, where they’re going into either mid-year renewals or even January 1 thinking about what it might mean for the market. Either there isn’t capacity or, if there is, then it isn’t being deployed in the market.

Chris Bonard: A lack of capacity would represent a big challenge for brokers in the market with a number of high-profile carriers having withdrawn. Property-cat is a tough world and so, for our customers, it’s about being prepared to go in early, being tactical and using different tools, which is where Bermuda and its creativity come to the forefront.

Dunleavy: A reset is needed in terms of buyers’ expectations. I have heard that buyers are “fatigued”, but how do they think we feel? It will be about capacity this year, not price.

Bonard: I also think we’re going to see a bifurcation. You’ll still want a diversified balance sheet but I think people will either want to write cat business and do it aggressively or probably not write a lot of it at all.

Carlos Wong-Fupuy: How and when capital enters the market will be determined by investor sentiment. The capital is there, but it is not being deployed into cat risk. There is investor fatigue. We have seen a number of projects with very interesting plans, but they are being downsized and repurposed, and the initial focus in cat is shifting. A challenge for Bermuda cat players is their dependence on the retrocessional market, which has also retracted. In contrast, the very biggest reinsurers have less dependence on this segment of the market and can be more bullish as a result.

Schneider: Ultimately, it’s a question of where does cat risk belong? Is it in the capital markets or in traditional reinsurers? There is room in the market for specialist cat players, as long as they can achieve adequate diversification.

Carvey: The way cat is written, very often the lines are blurred between catastrophe as a pure product loss and catastrophe exposures more generally. As a company in Bermuda, we look to set our stall in a simple way which is: you can write catastrophe-exposed business without always having to resort to pure excess of loss and all the volatility that it brings. You can share in some of that cat exposure without it having to mean you’re betting the ranch on the cat excess of loss model.

Govrin: It’s about capital allocation. If you have a product line that is volatile but has an appropriately high return, you’ll say, “I’ll allocate ‘x’ amount of capital to a very volatile line that produces an appropriately high return”.

Wong-Fupuy: A traditional cycle results in a tipping point of a loss followed by a sharp uptick in rates, followed by capacity entering the market and triggering a loss in underwriting discipline. The reaction this time has been much slower and the nature of the risk is changing as well.

Govrin: As people reduce their cat in their reinsurance business, that’s going to put a lot of pressure on casualty and specialty reinsurance pricing.

Dunleavy: We’ve had success at bringing third-party capital behind the casualty book, which is important for that part of our capitals markets division, which we’d like to grow. We’re diversifying the sources of capital for those insurance-linked securities (ILS) investors because getting them to participate across multiple classes makes that capital a bit stickier.

Govrin: High interest rates are going to drive even more reinsurance supply to longer tail lines.

Bell: We’ve written a reasonable amount of casualty re over the last few years just because the underlying rates have moved so dramatically, but it seems we’ve got to the point now where that’s going to have to flatten out or we’re not going to do any more. In Bermuda, we’ve gone from a gross written premium of $700 million to $1.4 billion in four years and that’s off the back of specialty.

Adderley: New, monoline reinsurers could potentially form in Bermuda, in the way they have in previous capacity crunches. They enter the market for just three or four years and exit again.

Govrin: I think monolines will struggle to achieve adequate returns because of the amount of capital that you have to hold without the capital benefit of diversification.

Schneider: Is capital actually coming into this market, though? I hear rumblings here and there, but it just doesn’t seem like the kind of market that’s going to generate a lot of capital. So, it makes us wonder what’s going to make the hard market in property end.

Bell: If you’re going to put capital into anything now, it’s easier to put it behind carriers that offer access to an existing book.

Bonard: I think it’s going back to fungible capital again: the old balance sheet is there and that creates alignment, but we’re now seeing a lot more people pulling together, either through managing general agent (MGA)-type models, whether owned MGAs or through consortiums. It allows you to access specialty, access that expertise, without building the infrastructure.