The dynamics around rates, a potential hardening market and the influence inflows of alternative capital were some of the main discussion points at the annual Bermuda:Re+ILS Monte Carlo roundtable, held in association with Markel Re, at the Rendez-Vous yesterday (Monday, September 9). Participants debated the extent to which the current rating environment is sustainable and what, if anything, might turn the market in the long term.

Christian Dunleavy, chief underwriting officer, Aspen Re, kicked off the discussion by stating that rates are clearly inadequate. He said that although rates are improving, any increases are merely keeping pace with loss cost inflation and reinsurers are not gaining any extra margin in real terms.

“There is a long way to go on rates,” he said.

Adam Szakmary, director of underwriting Bermuda, Hiscox Re + ILS, agreed, adding that the shape of the cycle needs to change to take into account the more flexible nature of capital and how quickly it can flow into the industry.

“In the past, the spike in rates post event was more pronounced,” he said. “Without that, the cycle should be smoother but rates must be sustainable.”

Dan Malloy, CEO of Third Point Re, said that his business was participating in the property cat market for the first time in a few years. He agreed with Dunleavy that although rates are improving there was a much more nuanced picture behind this.

Reinsurers might be getting paid more, but it was still less than two or three years ago. Further increases were needed, he said.

John Huff, president & CEO, Association of Bermuda Insurers and Reinsurers (ABIR), distinguished between the terms “hardening” and “firming”—he said the latter was probably a more accurate reflection of what was happening in the market. Where loss portfolios are affected, rates are increasing, but cedants are also being judged on their merits to a certain extent.

Peter Gadeke, executive vice president, Willis Re Bermuda, said that he saw rates increase at the June 1 renewal, but this represented more of a recalibration of the cost of risk, with carriers simply adjusting to what they see as a higher risk.

He said he does not necessarily believe the same scenario will play out in the January 1 renewal.

“Retro rates will increase and insurers are also achieving rate increases, but reinsurers seem to be squeezed in the middle,” he said.

Make it last

The issue of whether the industry is sustainable at current rates was a big topic of conversation.

Robert DeRose, senior director, global reinsurance ratings, AM Best, said he applauded the “positive market momentum” and said that this was required if the industry was to remain sustainable and continue to attract capital.

“We are optimistic but there needs to be an improvement,” he said.

He added that this was even more important given that there were signs that reserves in some cases could be inadequate. He noted that he felt alternative capital investors had learned some lessons as a result of the losses of 2017 and 2018, and the subsequent loss creep and issues around things such as trapped capital.

This would also hit the retro market, the impact flowing down into the reinsurance space, DeRose said.

That moved the debate on to the appetite of alternative capital investors. Kathleen Faries, chair of ILS Bermuda and of RICAP Bermuda, said she felt that inflows of capital from this sector have been somewhat flat as investors weigh up their approach to the sector.

Brad Adderley, partner, Appleby, disagreed. He said he was aware of a number of new vehicles that would be entering the market by the end of the year. He said that while the market was hoping for a firming of rates, this may not be the reality it was facing.

Andre Perez, chairman & CEO, Horseshoe Group, agreed. He said Horseshoe was seeing significant inflows of alternative capital into the sector and he expects more to come.

“Although investors would like rates to increase, their return expectations were lower than those of traditional players, meaning the sector remains attractive to them even when rates appear unsustainable to traditional players,” Perez said.

Many of the panel stressed that it was no longer relevant to view alternative capital and traditional capital as competing forces.

Huff noted that alternative capital was once seen as a threat, but now it was regarded more as “partner capital”, with almost all traditional players using it for themselves and for clients.

Szakmary confirmed that Hiscox sees this form of capital very much as partner capital, which its clients value.

DeRose said this was true but there had been a flight to traditional capital among cedants, preferring to buy a traditional reinsurance contract even if this was backed by the insurance-linked securities (ILS) markets.

“That allows for a better price but they also feel reassured there will be no complications or disputes,” he said.

Greg Wojciechowski, president & CEO, Bermuda Stock Exchange (BSX), said that Bermuda remained the hub of the ILS sector globally, which remained in robust health. He noted that Bermuda is home to 85 percent of all ILS deals globally and that even some deals structured under new regulations in London or Singapore had selected to be listed on the BSX.

“Bermuda remains at the centre of innovation for this sector and ILS is here to stay,” he said. He reminded the panel that the genesis of the ILS sector had two drivers: the fact that the risk was uncorrelated from other capital market instruments, and the fact that interest rates were so low.

“Both those factors remain true today,” he said. “This is still a very exciting time for this space and it is increasingly seen as partner capital as opposed to alternative capital.”

He added that ILS was increasingly been seen as ESG [environmental, social and governance] compliant, which could help drive growth.

“That is a very interesting angle;we love being part of this space,” he said.

Learning lessons

Arthur Wightman, Bermuda territory leader, PwC Caribbean, commented that the idea that investors had learned lessons after the losses of recent years may be misplaced.

“They are very sophisticated investors, they did not have their eyes shut,” he said. But he agreed that loss creep on some of the cat events had been an issue for the industry.

Neville Ching, managing partner, Capsicum Re, agreed. “We do need to learn more about why these issues happened,” he said.

“Some of these classes seem to have a longer tail than we thought.”

Peter Dunlop, partner, Walkers, noted that some of the surprises around losses had raised questions about the reliability of risk models for some perils, while the emergence of what had been considered secondary perils had surprised the market.

He noted that, even in instances where reinsurers were attempting to price these items correctly, there was resistance from cedants.

Rates should increase

Gadeke agreed that some cedants were simply resistant to paying more. This prompted Adderley to ask what it would take to convince cedants that rates should increase—and the market to improve in the long term.

Dunleavy agreed that the picture was far from simple. “It is a complex picture: retro is up, original rates are up, yet reinsurers are still squeezed.

“We look at it client by client, but overall the trend has to be up.”

Dunlop raised the issued of the protection gap and asked whether part of the solution for reinsurers was to seek growth and coverage in new areas.

Dunleavy agreed that this could present an opportunity, but noted that rates in any new areas must be adequate as well.

The discussion moved on to cyber—an area that could present good growth opportunities for the industry. Szakmary said the industry was still getting a handle on the complexity of the risk but more work was needed around how buyers could get paid quickly.

Such was the size of the exposure globally, capital from outside the industry could be leveraged, he said, adding that it would not be long before the first ILS deals covering cyber peril would be done.

Huff at the ABIR said he felt Bermuda could lead the way in this area.

“I am very bullish on Bermuda’s ability to lead the way on this risk,” he said.

“It won’t just be about indemnifying clients but about a broader form of protection where we are doing a lot more than simply paying claims.

“Regulators will look to push this to be covered as a standalone risk and Bermuda can lead the way in that.”

Leveraging tech

The debate covered another key way reinsurers can remain more competitive: by leveraging technology to improve their efficiency. Faries said that digitising the business and leveraging tools such as blockchain can achieve this and that Bermuda can lead the way in this regard. Faries is the chair of RICAP Bermuda (RIsk meets CAPital), a digital decentralised re/insurance platform that uses distributed ledger technology to support many of the functions of re/insurers.

“The market needs a set of global standards. That would allow us to move risk much more efficiently and achieve substantial cost savings,” she said.

“We must talk about this—the industry needs to look at its fundamentals and become more efficient.”

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