Reinsurance markets in Bermuda and the United States are not all that different, according to a recent rating agency report.
Despite the different dynamics and prospects of the United States and Bermuda reinsurance markets, they share many of the same challenges and opportunities, an analysis by Standard & Poor's found.
The report said that as the July 1 renewal season approaches, market participants expect to enjoy material increases in premium rates and in terms and conditions for property and related short-tail lines and for retrocessional lines.
"Still unknown, however, is whether these improvements will compensate reinsurers appropriately for higher frequency and severity risk," said S&P analyst Laline Carvalho.
For the rest of 2006, differences between United States and Bermuda reinsurers should remain as clear as ever. Whether U.S. reinsurers can turn around more than a decade of poor operating results, or whether Bermuda's earnings potential will be threatened by increased catastrophes, remains to be seen.
"At least for this year, both markets are poised for improved performance, especially if the winds blow mercifully in the coming hurricane season," the report said.
Last year represented a string of disappointments for the U.S. reinsurance sector, which significantly underperformed the global market.
While the domestic industry posted a 123 combined ratio for the year, global carriers came in at 108.
"The track record primarily reflects the tendency of U.S. casualty reinsurers to underprice and underreserve their business," Ms. Carvalho said.
The $4.8 billion in reserve additions added 21 points to the 2005 combined ratio, the report noted.
But on the positive side, only three companies accounted for about 80 percent of the additional reserving. "Any remaining additions to reserves for older accident years or for the 2005 catastrophes are expected to be offset by built-in redundancies from the more profitable 2002-2004 accident years," the report said.
A favorable regulatory environment and good infrastructure have made Bermuda the main destination for new capital entering the industry. Gross written premium has increased to $46 billion in 2005 from about $17 billion in 2001, the report said.
But Bermuda endured its worst year in 2005, leading to a consolidated return on equity of negative 6.5 percent. Some companies lost up to 25 percent of capital and a few extreme cases such as IPCRe and PXRe lost up to 100 percent of capital, S&P found.
The island's reliance on property-catastrophe writers will make its success ever more dependent on the whims of the environment, the report noted.
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