The Bermuda reinsurance market has taken a beating after this year’s string of catastrophes.
“The Bermuda market is predominantly a catastrophe-driven model—and you would expect that when there are catastrophes, it’s Bermuda that will take a big chunk of that,” says Julia Mather, head of advisory-service Miller Bermuda.
After all, cats, she notes, are “the whole reason Bermuda is there. [Reinsurers] just have to hope their chunk isn’t greater than they expected.”
But despite the heavy losses, the island remains resilient, with enough capital to absorb the blows. “When you look at the market in total, the losses were significant, but certainly manageable,” says Robert DeRose, vice president of A.M. Best Co.
The Bermuda market “is still very viable and certainly is a strong place to do reinsurance business. Its proximity to the U.S. is a significant strength,” DeRose adds.
Frederick J. Kohm Jr., a partner in the Economic Advisory Services division at advisory-service Grant Thornton LLP in Philadelphia, says reinsurers “will have to continue to get creative” in 2012.
“You still have that flat return that everybody needs to improve upon. Reinsurers will have to [create new] products and innovate to increase their bottom line. This will in turn identify the new market leaders out of Bermuda,” says Kohm.
THE LOSS PICTURE
Since the first quarter, Bermuda reinsurers have been in an underwriting loss position. But over the course of the year, as earned premiums have come through, the combined and loss ratios have started to improve.
Bermuda companies saw a combined ratio of 135 as of March 31, but the figure is now down to 108, compared to 97.3 at this time last year, reports DeRose.
“Obviously earthquakes can happen any time, but if the trend continues the way it’s going, it’s conceivable [Bermuda-based reinsurers] could be at break-even by the end of the year,” he adds. Even if they don’t see an underwriting profit, “it would be just a small underwriting loss.”
John Andre, group vice president with A.M. Best, notes that his firm has only taken one negative action this year, issuing a negative outlook on Flagstone Re. While the other Bermuda companies “had big losses and it hurt their earnings to date, they have the capital to adequately support the losses they’ve taken,” he adds.
The capital that is in Bermuda, his colleague DeRose adds, is still “very sound and solid.”
On the legislative front, the National Association of Insurance Commissioners’ model law has approved the reduction of collateral requirements—a positive for any insurer that operates offshore.
Also still out there, however, is the (recently reintroduced) Neal Bill, which would place significant restrictions on domestic insurers that cede reinsurance to their foreign affiliates.
“Obviously, it’s a threat,” says Andre. “I think that threat has had an impact on the Bermuda market: It has contributed to the number of companies that have redomiciled to Switzerland or Ireland for the last couple of years.”
For example, Flagstone went to Ireland, Ace went to Switzerland, and Allied World Assurance Co., the most recent, went to Switzerland.
“It’s not only the tax issue” driving these relocations, says Andre. “It’s the regulatory as well.”
Andre concludes that even with the redomiciles out of Bermuda, “there is still a lot of talent on the island. Ace, XL and Flagstone redomiciled,” but they still have “a huge presence on the island. They may have redomesticated for capital-efficiency reasons, but Bermuda is still a principal place of business for them.”
UNDERWRITING CHALLENGES
Mather observes that there will be a number of programs affected by the catastrophes, “and it’s not just the property side. It will be in areas like trade disruption. So it’s more far-reaching here than in other years.”
The impact this is having on the current renewal season is that “everything is changing,” Mather says. “You’ve got companies coming out of areas altogether—and so that creates gaps.”
In fact, some reinsurers are looking at “completely redoing all of their programs,” Mather notes. “So business seems to be a lot more up-for-grabs in those areas.”
All this instability in the market has led to a concern among underwriters: “I was talking to an underwriter last night who was saying the biggest issue is the quality of submissions,” says Mather. “They are just not getting all the information they need—because there are so many submissions coming in now because so much is being remarketed.”
The underwriter Mather spoke with, for example, saw one submission “that had been changed eight times, and he’s fed up with it.”
All this back-and-forth can often mean “not-clean submissions,” she says. “I would think this would make underwriters wonder about the accuracy of what they will actually base the underwriting on.”
But overall, Mather adds, “the Bermuda market is strong and the market is huge. I started here nine years ago and we had about 20 companies. We now have 40 companies.”
