The positive response of both traditional and alternative capital to the 2017 catastrophe losses was one of the main discussion points of the annual Bermuda roundtable held at the Monte Carlo Rendez-Vous hosted by Bermuda:Re+ILS and sponsored by Markel Global Reinsurance, as were the ways these two forms of capital are increasingly partnering.
Jed Rhoads, president and chief underwriting officer, Markel Global Reinsurance, kicked off the discussion by noting that, after almost 11 years of no big catastrophe losses, it has been an eventful 12 months, with several hurricanes hitting the US followed by some of the worst wildfires ever seen.
“The market handled it all extremely well,” Rhoads said. “The great thing is that the industry was able to respond and pay claims quickly. Bermuda was at the front and centre of that process.
“Lessons will be learned: some players will be examining certain structures and some aggregate covers that were in place, but there will be no big changes as a result.”
John Huff, chief executive, Association of Bermuda Insurers and Reinsurers (ABIR), added that everyone he has spoken to in the aftermath of the losses has been unanimous in their praise for the market’s reaction.
“From regulators, to cedants to brokers, I have been told the market was paying claims within days and there have been no issues. It shows why Bermuda is first in class when it comes to cat risk.”
Kathleen Faries, head of Bermuda, Tokio Millennium Re, noted that many would have been keen to see exactly how ILS players would respond to what would have been the first major test for many.
“In fact, we saw them reload very quickly and their response in terms of claims payments was very similar to that of the traditional players. It was all very orderly and there were no issues at all,” she said.
Dan Malloy, chief executive, Third Point Reinsurance, added that although his firm was largely an observer to the cat losses as it does not participate much in that market, it benefited from some wider rate hikes in other lines of business triggered by the losses.
“We had a pretty active fourth quarter as a result,” he said.
Mark Berry, head of specialty, XL Catlin, said that, for traditional players, their reaction to losses of this nature represents something of a bellwether—they want to make good on their promise to pay because they understand that this can give them a competitive advantage.
“This was our chance to shine, and we did,” he said. “We had not seen activity of this nature for a long time and I think there was the sense we wanted to take the opportunity to differentiate ourselves.”
Here to stay
Greg Wojciechowski, chief executive, Bermuda Stock Exchange, said the sector’s reaction to the losses illustrated that it is committed to the sector and here to stay. He said it was affirmative to see the exchange, on which are listed some 80 percent of all ILS deals globally, being used in the aftermath of the losses as investors reloaded and committed more capital to the space.
“Bermuda has again proved its resilience— we have the product and platform but it was great to see it being used in this way,” he said. “It was a clear testament to the fact that investors are here to stay.
“They are also increasingly interested in developing new products and exploring new types of risk. The market was already established and committed but I think 2017 will be seen as a pivotal year by some.”
Arthur Wightman, territory leader for PwC Bermuda, added that this represented a true test of the ILS sector and its response will help affirm its validity. He noted that this year has also seen some other important developments, with the biggest insurers such as AIG showing an increased interest in leveraging the ILS space and some consolidation being driven by a desire to gain a foothold in this space.
Brad Adderley, partner, Appleby, agreed that it was a bellwether event for the ILS market. “There was never any question of the market’s not paying claims,” he said. “If anything, more money came in after the event.” He also raised the point that, of the new capital that entered the space, there was something of a flight to quality towards bigger, more established players.
Faries said that scale and relevance will be growing themes for the ILS sector and the reinsurance industry more widely, also suggesting that more traditional players would seek diversification by partnering with players on the ILS side.
Robert DeRose, senior director, AM Best, agreed that size was becoming more important in the ILS sector. He noted that the top 10 ILS funds control around 70 percent of the market. “Their size and track record engenders confidence in investors,” he said.
Adderley stressed the importance of having access to the original risk, suggesting that the biggest players in the ILS space have this access—and that smaller players may not.
Peter Gadeke, executive vice president, Willis Re, made the point, however, that the 2017 cat losses were not out of the ordinary in any way—they were within the predictions of models and therefore within investors’ expectations. They may have reacted differently, he suggested, to a loss that was outside of their expectations.
Paschal Brooks, executive vice president and managing director, AlphaCat Capital, agreed with this, noting that investors had a very good understanding of what the losses were and their implications. “Investors were prepared for this and they reacted quickly,” he said.
But, he added, their outlook on the industry may have changed a little since. First, the actual losses from these events, which have been trickling through during 2018, have often been a lot higher than the initial 2017 predictions, he said. A number of things such as demand surge and lawsuits in Florida have led to increases.
Second, he noted, many investors reloaded quickly on the basis of projected rate increases that did not transpire in reality. He noted they were ultimately lower than expected.
Rhoads added that the ILS sector does reserve in a different way from traditional players—but they did this based on what they were told at the time.
He said that as a result of this, some investors may re-evaluate their understanding of pricing in the cycle and be wary of predictions of rate increases—and also which companies they partner with going forward. But their overall commitment to the sector would be unchanged.
The discussion moved on to the nature of the relationship between the traditional reinsurance sector and ILS.
Huff said that the ABIR had started using the term ‘partnering’ to describe the relationship. “It is a more meaningful term; it means we speak with a single voice and our advocacy of what we do on Bermuda is stronger as a result.”
Berry agreed that this was a good way of putting it, and noted that it also illustrated where the traditional market should focus its efforts going forward.
“We need to focus on underwriting and getting a handle on some of the emerging risks,” he said.
Malloy agreed, noting that given the robust supply side of the industry, it should be considering where else it can deploy capital. He noted that the idea of transferring risks from the public sector to the private sector could and should be a big growth industry.
“Look at mortgage reinsurance. It is a revelation,” he said. “The risk was once held by monolines and now it is much more diversified, thanks to our industry.”
DeRose agreed but also noted that the risk was not suited to all reinsurers.
“You need to really understand it and be comfortable with its very long tail nature,” he said.
Rhoads said that the instances of where risk has been transferred from the public to the private sector are actually the tip of the iceberg.
He said a lot more potential deals were in the pipeline—especially on flood risk. He stressed that there was no reason the private sector could not handle the majority of flood risk.
“It is not like cyber, where the risk is really hard to price. I believe we could handle about 85 percent of what is out there,” he said.
Wojciechowski said Bermuda could play an important role in facilitating dialogue on the transfer of more risks into the private sector.
“We can advocate delivering real economic value to the world by doing this,” he said, “with more products and more coverage designed to help close the protection gap.
“It is about partnerships and the evolutionary relationship between ILS and reinsurers we have on Bermuda.”
The panellists agreed that supply and demand was the single most important equation to consider on pricing, and there was little the industry could do to sway this. Although some further rate increases may occur on specific lines in Florida, little overall change is expected on price in the year-end renewals.
They all also agreed, however, that this could change quickly if another big hurricane loss were to emerge in 2018.
“We need to recall how we felt this time last year when we thought Irma could represent a $150 billion loss on its own,” Berry said.
Rhoads agreed: “A year ago, people were extraordinarily nervous. If the losses had been much bigger, we could be having a different conversation now.”