NU Online News Service, Dec. 9, 3:11 p.m. EST

Recent global catastrophes and revised catastrophe models may end up reversing a decline in demand for reinsurance capacity A.M. Best says in a special report on the Bermuda market.

The revised cat models also have caused some reinsurers to rethink their pricing and capital requirements.

Despite the impacts of high-catastrophe losses in 2011, a prolonged soft market and low investment returns, the Bermuda insurance and reinsurance market has managed to preserve its capital base and prepare for what is shaping up to be a difficult, yet promising, renewal season, according to Best's report.

As in 2010, following the Chilean earthquake and the Deepwater Horizon disaster, areas impacted by disasters and related lines of business have seen higher prices in 2011. However, in 2011, some insurers have begun reconsidering their catastrophe exposure for geographic areas considered noncore, the report says.

Because these “noncore” areas have more uncertainty in catastrophe models, price adequacy can be questionable, the report notes. And so while catastrophe pricing has improved in some regions, companies are reducing exposures rather than crowding into a market for a larger share.

Casualty classes appear to have hit a bottom, according to the report. Deteriorating investment yields have made it increasingly difficult to achieve an economic profit on longer-tail classes of business.

Both primary and reinsurance Bermuda companies have seen favorable loss-reserve development from casualty business written in the early part of the last decade, A.M. Best explains, adding that it believes that the flow of earnings, which has masked underlying deterioration in the accident-year trend, is drying up and that a market turn for casualty business is nearing.

The ratings agency concludes in its report that, for 2011, the market appears poised for a meager bottom-line profit, or possibly its first underwriting loss since 2005.

But the report says context is important. The purpose of the (re)insurance industry is to serve as a risk-management tool for its clients and to be there to pay claims. In the wake of the global catastrophes of 2011, which will be ranked among the costliest years on record, the story of the Bermuda market is one of resilience, A.M. Best says.

Special Reports /

Cats, Model Changes Could Reverse Declining Demand in Bermuda Market

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