Bermuda at the forefront of emerging risks

The re/insurance industry is in a period of rapid change: new risks are constantly emerging, driving an ongoing need for adaptation and innovation—and Bermuda is at the forefront of the drive to provide the solutions and capacity to stay ahead of the game.

Top of mind for many is climate change—a developing risk that brings a whole array of challenges.

“It goes without saying that climate change is a risk that we are constantly trying to keep in front of, it’s no longer ‘emerging’—it feels as though it is here for the foreseeable future,” says Tim Shreeve, head of platform development at Ariel Re.

“We spend a considerable amount of resource on our exposure data and model parameters to give us and our investors comfort that we are structuring and pricing risk in a way that delivers sustainable profitability.

“It continues to be a focus for the investor community within insurance, and rightly so.”

John Turner, chairman at Ed Broking Bermuda, agrees that climate change is now a perennial theme.

“The growing severity of losses stemming from natural perils is being widely discussed this year,” he says. “We are seeing changing weather-related risks, manifesting in an increase in secondary cat losses. Losses associated with wind in Tier 1 zones are growing, as are losses linked to tornadoes and hail. Meanwhile, winter freeze and wildfire are increasing, affecting insureds across a broad range of US states.”

An equally strong current is the ever-evolving field of cyber-risk. Ariel Re is working on a cyber strategy and sees this class of business at an interesting maturation phase.

“Driven by recent loss activity and the realisation of risks that have emerged through the coverage that has been offered, we are hopeful that we can build a product offering that the market will find attractive and relevant, and we have hired a team to build this side of our business,” says Shreeve.

“We have licensed the CyberCube model and are excited to build an analytics-driven approach to this class, just as we have on the property cat side, and expand our market footprint in the reinsurance cyber market in the future.”

Turner agrees that cyber remains a hot topic. “There are surging risks associated with cyber, particularly ransomware, crypto exposures (which also have significant environmental, social, and corporate governance concerns due to huge power usage), and growing political risk stemming from the situation in Ukraine,” he says.

“All these risks, and the continued tailwinds caused by COVID-19, have knock-on effects for contingent business interruption, supply chain disruption, and the cost of transporting and shipping goods. The ultimate result is a demand surge affecting the entire economy.”

Shreeve highlights the issue of social inflation: especially within Ariel Re’s casualty segment, this has been a key focus for the last few years. Securities class action activity remains elevated (although this dropped to a 10-year low last year), viral social movements remain a powerful driver of claim activity, and litigation financing is pushing claims frequency.

“We look to our clients to underwrite and risk select around these emerging risks and to build in sufficient price for them,” says Shreeve. “This has been a big driver of the market correction we have observed in recent history. Compounding rate improvement in the US D&O space over the past two years is material while the average limits deployed are down.

“Ancillary coverages are being priced for and exclusions are becoming more commonplace, as you would expect in a hardening market. Insurers are doing well to avoid certain lawyer-friendly states and counties, or if they are knowingly writing business in these geographies, we are seeing commensurate pricing.

“Our casualty portfolio is very much focused on professional lines where the social inflation impact has been more muted vs the GL market.”

Social inflation is not as big a factor within Ariel Re’s property portfolio, other than in very specific examples such as the Florida market, with its high percentage of litigated claims, which the company has been closely monitoring for years. Monetary inflation, however, and its sudden spike relative to recent history, is something that Ariel Re has been paying close attention to as an emerging risk.

“It’s a complicated problem because it has a number of components other than a headline inflation rate on values, as well as being very tailored to cedant considerations,” says Shreeve.

“We have been working closely with cedants during renewal discussions to understand what they have been doing to re-underwrite the values within their portfolios and the inflation guards within their policies to then establish baselines before we start making our own adjustments.

“We have been changing our modelling to consider the effects of demand surge and the current supply chain disruption and what impacts those might have on our portfolio post-loss, as well as performing some stress-testing scenarios.”

Data analytics company Praedicat uses three phases to describe emerging risk. There are dozens of emerging risks in the earliest stage, which Praedicat calls Emerging Interest. This phase is when scientists are beginning to show interest in hypotheses that commercial practices or products can cause harm.

“Two interesting and interrelated items we are seeing emerge are mycotoxins, the prevalence is which likely to increase because of climate change, and strobilurin fungicides, which are frequently used to combat mycotoxin-releasing moulds,” says Adam Grossman, vice president of emerging risk, and senior scientist at Praedicat.

The second phase Praedicat calls Emerging Damage. While fewer than in Emerging Interest, there are many risks in this category.

“During this phase the risk of litigation remains low to moderate, but scientists are actively studying hypotheses that these hazards are causing harm,” says Grossman. “The most prominent new emerging risk that we are tracking in this category is microplastics. Research on microplastics has accelerated so quickly that it’s one of the fastest-moving literatures we’ve ever seen.”

The last stage of risk emergence Praedicat terms Emerging Litigation, which is the smallest but most prominent category. One important new litigation is climate change-driven: the arsenic and baby food litigation that is in its early stages.

“Another emerging litigation risk that is a bit farther along but still relatively early in the process is water remediation of per- and polyfluoroalkyl substances (PFAS),” says Grossman.

“All these risks pose the problem of aggregation risk for liability insurers, and in particular, they all involve both within-line and across-line clash risk. Beyond that, each risk poses its own unique questions and challenges.

“I’ll focus on one Emerging Damage and one Emerging Litigation risk. First, PFAS litigation thus far is mostly confined to scattered industrial sites that have allowed PFAS to escape and contaminate local water supplies. As this litigation continues to expand, however. PFAS is presenting an increasing amount of risk emerging from governments.

“We may begin to see additional lawsuits filed akin to those filed by the Michigan attorney general that seek state-wide remediation from a broad array of companies which caused PFAS pollution either directly or indirectly. Another pending question is what the US Environmental Protection Agency will decide to apply as a maximum contaminant level for PFAS in drinking water, a decision we expect later this year.”

Grossman adds that in the Emerging Damage phase, the rapid rise of microplastics research leads to many questions and potential challenges.

“While we already know that microplastic pollution can have grave consequences for aquatic life, its effects on terrestrial life and humans are still in the early stages of discovery,” he says. “If scientists show that microplastic exposure causes bodily injury to humans it’s a safe bet that litigation will swiftly emerge to try to hold the relevant parties responsible.”

Grossman says the re/insurance industry is becoming increasingly focused on emerging risk, and adopting new data and technologies for managing aggregation in liability insurance. However, he notes, the industry has a big task.

“In many cases, when faced with large and complex risks, there’s an instinct to safeguard the company’s capital by excluding the risk entirely,” he says. “While that approach certainly provides a strong defence, it risks limiting coverage to the point where it doesn’t necessarily provide value.

“We are aware of insurers taking more nuanced views of these and other complex risks, figuring out how to cover them using a variety of underwriting tools alongside a well-suited reinsurance programme,” Grossman says.

“Most importantly, we see insurers moving from a reactive posture, where they focus on a risk only after litigation emerges, to a more proactive process of evaluating the latent emerging risks in their portfolio and during the underwriting phase.”

Turner notes that traditionally parametric-type solutions have been positioned to support global re/insurance clients in the emerging risks space.

“There is a real and growing opportunity to extend these protections to direct clients,” he says.

Grossman agrees that emerging risks bring opportunities—and these opportunities are as broad as the risks themselves.

“Risks earlier in their emergence are amenable to smart underwriting and accumulation management,” he says. “Risks that have reached the Emerging Damage phase can be managed in many ways: from the underwriting stage, using portfolio steering approaches, and by buying appropriate reinsurance.

“Other emerging risks are less likely to lead to successful litigation, according to the scientific literature, than they are perceived to be. These present opportunities for insurers to get more premium for covering these risks or for moving lower in an insurance tower when the risk is similar to that seen higher in the tower for the same company.

“The best way to keep up with emerging risks is by following the scientific literature so that they can be identified and managed from the Emerging Interest stage,” he adds. “Early identification and accumulation management leads to sustainable underwriting and profitability.”

Grossman notes that when it comes to liability, Bermuda is a centre of innovation in coverage.

“A particular advantage of Bermuda’s market is the use of the integrated occurrence trigger, which is sometimes called the Bermuda form,” he says.

“This trigger controls stacking across policy years, which is liability’s most serious aggregation problem. All the emerging risks we’ve described beyond Emerging Interest are best covered on the Bermuda form.”

Turner agrees that Bermuda is leading the way with innovation, driven by world-leading talent that can respond to an increasingly complex and uncertain risk environment.

“There has been a surge of capital arriving on the Island, overwhelmingly backing the class of 2021/22 insurance carriers,” he says. “Many of these new carriers have bold underwriting visions and are looking for ways of adapting solutions for clients.

“This has most recently been manifested in solutions/capacity for primary cryptocurrency exposures and primary first-party wildfire exposures, demonstrating the extent to which the Island is at the forefront of re/insuring emerging, niche, and complex risk.

“There has been an upsurge in alternative markets for parametric solutions linked to wildfire perils, as well as traditional risk transfer mechanisms catering to these exposures. Ultimately, Bermuda offers worldwide clients a blend of traditional and non-traditional solutions which will be instrumental to managing risk through the 2020s,” he concludes.