Q1: HOW WOULD YOU CHARACTERISE MARKET CONDITIONS FOR REINSURERS?
Paul Simons: I head the property unit for our global markets segment and I also lead our Bermuda reinsurance division.
The reinsurance market is always fascinating, and I believe it will be even more fascinating in 2022.
The last five years have been difficult due to significant cat activity and resulting losses; 2021 has been no exception. The frequency and intensity of cat events have increased.
As a result, profitability in this line has been hampered. Reinsurers are at an inflexion point right now. The dynamic is evolving but we see this as a chance to continue to differentiate ourselves as a market offering leadership to clients and brokers.
Adam Champion: We are creating a new reinsurance business and a capital markets team here in Bermuda. We primarily work with startups, new funds, institutional investors, and other local carriers in the reinsurance and capital markets arena.
We are focused on connecting risk to capital; assisting clients in developing new structures to attract third party capital.
We are fortunate to already have a number of mandates with new startups, both in the traditional rated balance sheet and the insurance-linked securities (ILS) space.
Anup Seth: I’m the global leader of Aon’s Underwriting Solutions, which includes our global ILS and commercial reinsurance advisory businesses, as well as our protected cell firm.
I’d characterise the market as still hard, but the level of rate increases for the traditional P&C lines of business is beginning to decelerate.
Christian Dunleavy: I’m the chief underwriting officer for Aspen Re and the chief executive officer of Aspen Bermuda, Aspen’s Bermuda operating entity. I manage group cat risk and exposure management.
I agree that it’s a tough market. It isn’t easy in places, and there’s a distinction to be made between insurance and reinsurance.
I’d say the reinsurance market specifically is difficult. It’s better than it was but it’s not yet at long-term sustainable pricing levels. Even though a significant amount of rate has flowed in across several classes, results have yet to materialise.
You could argue that we’re approaching hard market rates, but you’ve not seen hard market results yet. That will keep a floor under pricing conditions.
But there is a lot of uncertainty. From my perspective, this means that we will continue to be in a relatively strong underwriting environment for the next couple of years.
Matt Britten: I’m a partner with PwC Bermuda, and my primary responsibility is to lead our risk assurance practice, from which we provide risk and controls-related services to all of our clients. In addition, I lead a team that focuses on audits of commercial insurers and reinsurers in Bermuda.
In terms of some high-level observations, the market has handled the operational and financial challenges of the pandemic admirably. The market is still well capitalised despite four to five years of significant losses.
However, as a result reinsurers are struggling to deliver risk-adjusted returns. And that is problematic.
So it’s a tough market, but is the market going to get hard enough to allow reinsurers to meet and exceed their cost of capital? If it’s a hard market, where are the hard market profits?
Josephine Noddings: I work as a senior associate for Appleby in the insurance team. The reinsurance side is a very dynamic and changing market at the moment.
Because of the difficulties that reinsurers have faced in recent years, they are rethinking how they structure and conduct business to deliver profits to investors.
It’s an exciting time to be in the reinsurance space and watch how it develops and grows.
Hopefully the market will harden, and we’ll be able to experiment with what we do with those profits, how we structure them, and how we deliver them to investors.
John Huff: I am the chief executive officer of the Association of Bermuda Insurers and Reinsurers, the Island’s most established trade group. I’m a little more optimistic. There has been a shift in the last few weeks in the P&C space.
Some describe it as an improving market driven by the significant losses from Hurricane Ida and the flood events in the US and Europe. Unsurprisingly, the top-line conversation is around climate change and what it might mean for our industry.
After some of the results we have seen, it will be interesting to see if some companies limit how much capital they deploy in the cat cat space and what that means for the market.
I am keeping a close eye on the retro markets.
My understanding is that analysts believe the insurance side drove the rate we saw in 2021, whereas the rate we will see in 2022 will be driven by reinsurance and retro. I thought it is a unique perspective.
Q2: WHAT ARE THE DYNAMICS IN THIS RENEWAL SO FAR?
Simons: It is still early in terms of how everything will play out. Regarding supply and demand, there has been some debate on the influence of retro capacity or the lack thereof. In this instance the tail may wag the dog. Margins and returns both need to improve.
But from a shareholder’s standpoint, the cost of capital simply isn’t being met. And we are still trying to understand what appears to be a shifting climate environment, which is undoubtedly driving behaviour and pricing. We also need to better understand the long tail classes and the impact of social inflation.
When I listened to earnings calls previously, it sounded like some managements may want to walk down to the floor and have a chat with their underwriters. Because what they are doing is not lining up.
That gap has narrowed, and the mandates from management are being enforced a lot harder now.
Underwriters are human, CEOs are human, and their psychology is critical. People have not been compensated the way they probably expected to be. All those things create this environment where people are still pretty focused on getting the correct risk-adjusted rate.
The dynamic has shifted, but, particularly in the cat world, so much of that market has been defined in the last 10 years by ILS capacity. Yet that is either withdrawing or shifting away from sidecars. All of that impacts how people can deploy capital. Sometimes we overestimate the impact of a single year, and we underestimate the impact of five-plus years.
We will see significant improvements when you look at the cumulative effect of the pricing environment from the beginning of 2019 and through to 2022 and 2023.
Shareholders and others are probably getting a little tired because they’re presented with plans on an underwriting year basis, which look like some of the best plans they’ve ever seen, and then the results are still not there—they’re quite the opposite in some cases. That gap has to narrow.
Dunleavy: What we anticipated last year mainly did materialise. I wouldn’t characterise this as a challenging market because there has not been a sharp spike in pricing. We’re also in an environment where there is capacity and losses have been more earnings events. The solvency and credit quality of reinsurers has not diminished.
But from a shareholder’s standpoint, the cost of capital simply isn’t being met. And we are still trying to understand what appears to be a shifting climate environment, which is undoubtedly driving behaviour and pricing. We also need to better understand the long tail classes and the impact of social inflation.
When I listened to earnings calls previously, it sounded like some managements may want to walk down to the floor and have a chat with their underwriters. Because what they are doing is not lining up.
That gap has narrowed, and the mandates from management are being enforced a lot harder now.
Underwriters are human, CEOs are human, and their psychology is critical. People have not been compensated the way they probably expected to be. All those things create this environment where people are still pretty focused on getting the correct risk-adjusted rate.
The dynamic has shifted, but, particularly in the cat world, so much of that market has been defined in the last 10 years by ILS capacity. Yet that is either withdrawing or shifting away from sidecars. All of that impacts how people can deploy capital. Sometimes we overestimate the impact of a single year, and we underestimate the impact of five-plus years.
We will see significant improvements when you look at the cumulative effect of the pricing environment from the beginning of 2019 and through to 2022 and 2023.
Shareholders and others are probably getting a little tired because they’re presented with plans on an underwriting year basis, which look like some of the best plans they’ve ever seen, and then the results are still not there—they’re quite the opposite in some cases. That gap has to narrow.
Britten: It’s important to add that we’re coming off the back of one of the longest soft markets historically.
And you can say that rates need to go up a lot more to reverse the impact of that soft market, but uniformity of discipline across the market is going to be needed for that rate to get back to where it once was.
Dunleavy: I agree. Take, for example, Europe. For the past 10 years, people have given up 5 percent of their rate every year. So if rates increased by 10 percent, it’s insignificant. There has to be significant repricing in certain markets.
When you give up 5 percent for a decade-plus, you’ve cut your pricing more than in half. And it’s terrible news. The European floods should not have caused the kind of impact that they did from an earnings perspective. In Europe, there’s just not enough rate. It’s very simple.
Champion: The diversification that you get from a modelling perspective determines the capital required to cover those risks. Yet the price continues to get lower and lower.
When we talk about a challenging market, we all agree that a true hard market is when there’s no capacity—and lately there’s been capacity. Deals have been getting done, and cedants have been fighting quite hard to get the rate they think they deserve, based on the performance of their portfolio. So while they accept small to moderate rate increases, they know that their deals will get done. It’s a fine point between available capacity and a true hard market.
And it will be interesting to see how the insurance market responds in this coming renewal.
Seth: From an Aon perspective, when we evaluate the overall cat losses, we expect this year to have a similar total insured loss of around $100 billion for pure nat cat, similar to 2020. But the frequency of the severe losses is very different.
Last year we had a huge number of smaller losses (between $1 billion and $5 billion); Hurricane Laura was the only one that touched around the $10 billion mark. However, this year, we’ve had three huge losses.
The way that impacts the retro market is very different. This year, we’re seeing many retro programmes being impacted, both occurrence and aggregate contracts. Therefore, we expect a significant reduction in retro capacity coming to one in 2022. We also need to factor in the trapped collateral.
However, we have also seen very active cat bond and mortgage insurance bond markets. We do expect that trend to continue into next year.
Noddings: In terms of renewals, there are many uncertainties around how property losses might play out and how climate change might exacerbate losses in the future. This suggests prices may be subject to some uncertainty and investors are mindful around where they put their capital.
This also applies to environmental, social, and corporate governance (ESG) issues which investors are increasingly concerned about when considering where their money is going, and that could impact capacity.
That said, there is additional capacity coming in. This would typically make the market much softer than it is. Perhaps it is because we’re coming off the back of such a very soft market, but that is not necessarily having the same impact.
Q3: WHAT IS THE SIGNIFICANCE OF THE STARTUPS THAT HAVE LAUNCHED ON BERMUDA?
Noddings: Bermuda is at the forefront of insurance regulation globally. The regulations mean investors are very clear as to where their capital is going and how it is going to be treated. All the additional capital can only be a good thing for Bermuda.
It’ll help continue the investment, growth, and development of the markets in Bermuda. But it’s coming because of the quality of the regulation we have thanks to the Bermuda Monetary Authority (BMA).
Our regulator is at the forefront of innovative regulation. It’s developing on the technology front, while making sure it’s at the forefront of developments in the insurance industry.
Britten: The reasons that capital comes to Bermuda have been the same for many years. It was the same reasons after Hurricane Andrew or 9/11, and all those other challenging markets. The capital comes because of Bermuda’s respected legal system, regulatory environment, full-service infrastructure and the fact that buyers come to Bermuda to place their risks. All of those things are still very pertinent and genuinely good reasons capital comes to Bermuda.
There are a few differences this time around. One is talent; it seems many top executives were looking for new opportunities and waiting for the right time to come back into the marketplace.
From the perspective of attracting underwriting talent, new starts have a unique opportunity because they are unencumbered capital.
Some underwriters may have felt that they were constrained as part of larger groups, which may have looked to dampen down the volatility they’ve been taking on. Those underwriters see the new startups as places where they can get back to doing the business they want to.
So that’s important. In addition, the 2021 new starts have seen Convex and Fidelis raise and deploy their capital relatively quickly, both of whom recently have raised more.
But the startups are just part of the story. Many other existing players have raised capital; we’ve seen Lloyd’s carriers open up class fours in Bermuda, we’ve seen brokers open up a new office or acquire an existing one to expand into reinsurance, we’ve seen traditional players move their treaty business to Bermuda from Lloyd’s because of the changes in underwriting standards in Lloyd’s.
So there’s a lot of momentum in Bermuda outside of the startups. That’s extremely positive. That’s putting a real reaffirmation on the Bermuda market.
Huff: We use the terms “startups” and “scale-ups” and they all demonstrate the strength of the Bermuda market. The regulation is a big draw for investors because, in Bermuda, you know precisely where you’ll be in the process of forming a company, where you’ll be in line, what to expect, and, most crucially, who you’ll be dealing with.
A consolidated regulator is a market differentiator for Bermuda. As a result, having a startup in Bermuda is a huge plus. But, in reality, we’re talking about both startups and scale-ups. We have seen significant capital being raised by some of our existing legacy firms.
Champion: One must not underestimate Bermuda’s regulatory, advisory, and legal environment and how quickly that can facilitate a company from idea to execution.
You must not underestimate the impact of what Lloyd’s has been going through over the last five years on Bermuda. That is clear in the number of ongoing transactions, scale-ups, and the continuing shift of focus we have seen to Bermuda.
In addition, you can’t overstate the impact of a clean balance sheet. As a result we’re seeing a number of clean balance sheets launching in Bermuda, amid this very difficult period for Lloyd’s.
So this is an exciting time for Bermuda. While it is a challenging market for those who have been beaten up over the last four years, it’s a hard market only for those with a clean balance sheet. We are fortunate that there are a number of those in the market with very talented people who will try and execute them.
Dunleavy: Convex has probably the best positioned as it had things in place before the pricing environment changed. Maybe it was fortuitous timing.
But in terms of all the startups, I haven’t seen anybody being irresponsible. In fact, there are many more regulatory and rating agency constraints on startups today. They will have to a watch their exposures because the regulators and the rating agencies would respond.
The discipline we are seeing is more driven by resolve and commitment to getting appropriate risk-adjusted pricing. And I’m not sure anybody wants to be the poster child for over-competing.
One of the reasons that this market has legs is that you see more reinsurers move to try to participate on a pro-rata basis because that’s where a lot of the original rate is and people are being sensible with how much limit they deploy.
Meanwhile, some of the measures Lloyd’s has taken have tied people’s hands. If they have bad impulses, they can’t really necessarily follow through on them.
As a result, everything is in place for a sustained period of rising rates. The rate of increase is slowing, for sure. And it’s pretty fragile. It wouldn’t take much to change the picture quickly. What we drive is discipline on our underwriting teams.
I would add that there’s also been a pretty big effort in the legacy market. Many existing players have essentially tried to create clean up their balance sheets, through adverse development covers.
They are trying to put themselves on an equal footing with some of the startups. Through adverse development covers you’re to clean up your balance sheet, and operate on a much more go-forward basis.
Simons: Everything is based on timing and the new companies are entering the market at the right time. It doesn’t mean they’re immune to all of the problems, particularly within a growing business.
Building a business is interesting; it will appeal to underwriters and others but established organisations will have much longer and deeper client connections in place.
That said, it is good for Bermuda and clients love options. Ultimately, it is good for business; it’s good for the market to have these new companies with unencumbered capital. We’ve taken the approach that we’re going to partner with some of these companies.
When you’ve been around and trading for a long time, your clients aren’t going to move business easily. There will be established connections there. They will need financial incentives to move.
We have access to clients and markets that the startups do not so we are open to partnering with them.
Champion: I would add that some of the more interesting conversations we’ve had the last few months are on the run-off side. I think we’re going to continue to see that space grow explosively over the next few years.
The managing general agent (MGA) space is another area of opportunity due to a real dislocation in Lloyd’s binder business. We expect more and more MGAs coming to Bermuda and looking for capacity and partnerships. And we expect some of the bigger carriers to manage multiple MGAs, as part of a platform, to take advantage of the considerable infrastructure they have as a large company.
Huff: I agree that the run-off issue could be transformational for our market if we get the run-off space correct. The book has not been written yet, but there’s no better area that we need to be working collaboratively in cooperation with one another.
The US regulatory structure has not reached a landing on how run-off will work in the US. The UK is full of expense and is very cumbersome; this is an area that’s ripe for us to get right.
Noddings: The recent startups we have seen in Bermuda are using significantly different arrangements compared with what we’ve seen previously.
They’re abandoning the more standard legal structures they’ve historically used in favour of distinct capital arrangements and investment structures.
I believe it all contributes to keeping the market fresh and ensuring that we can offer products to investors that are current and up to date.
Q4: WHAT INNOVATIONS OR NEW DEVELOPMENTS ARE YOU SEEING?
Simons: Climate change and ESG are both things we’re spending a lot of time on top of the house. We are considering the best way to deploy capital when it comes to green investments. We’re also focusing on AXA’s long-term exit strategy of reducing exposure to the thermal coal industry to zero by 2030 in the EU and Organisation for Economic Co-operation and Development countries, and by 2040 in the rest of the world.
Another development that is worth noting is the need to attract and retain young talent as a large number of very experienced individuals are retiring from the industry. This creates opportunities for some talented young people.
Also, younger folks demand a lot more flexibility around how, where, and why they work.
It’s not just about a paycheck. Our industry needs to innovate around talent.
Champion: Given that my background is in catastrophe modelling I have a real commitment to bringing data and technical expertise in-house rather than just licensing tools to help understand risk.
Further, it’s clear that capital and balance sheet decisions are truly being dictated by a carrier’s ability to address ESG. Carriers that want to attract third party capital going forward will have to deal with that. Money is already flowing in that direction.
It’s more than lip service and those that get on board will win, those that don’t will fall short. From our perspective, we’ve developed tangible ESG analytics and we are building a product to help the market address it.
However, they look at life differently, and the industry needs to adapt with them. For example, the industry needs to embrace technology better. I know it’s happening, but it always seems to be at a snail’s pace.
Seth: I agree with the comments around the legacy markets. If we can crack this, in addition to some of the trapped collateral solutions that we desperately need, Bermuda will benefit.
The legacy market has traditionally focused on the casualty side, the long tail. Yet we’re now discussing legacy cat portfolios. That’s interesting, almost like a non-Lloyd’s reinsurance to close (RITC) partnership that they could set up with an ILS fund or other markets here in Bermuda. Watch this space.
We also should not forget the innovation on the life side. We continue to see asset-intensive life companies coming to Bermuda for all the reasons we mentioned earlier. And we are also seeing some long-tail sidecars coming to Bermuda, casualty sidecars. That’s an exciting development on the Island as well.
It shows how the ILS industry is innovating and diversifying. These are some of the examples of innovation that we’re seeing. Looking into the future, I hope that Bermuda can continue to be the innovative centre and the world’s risk capital.
We can continue to bring risk and capital together efficiently. And there’s every reason to believe we’ve got the proper regulatory framework. If we maintain the right talent pool, there’s no reason why we wouldn’t thrive.
Dunleavy: I’d endorse a lot of the sentiment on the legacy as well as ILS expanding outside of cat. That’s very quietly been happening in the background as a natural evolution of ILS, but also probably somewhat of necessity because they were kind of undiversified in cat.
Other than that, there are some opportunities to think about some long-term public-private partnerships around some of these difficult risks.
We want as much of it in the private space as possible, but some risks, such as pandemics, are too complicated for the private sector to take on alone.
And there are opportunities in things such as cyber where public-private solutions could enhance the product offering. And maybe this is a little counter to innovation, but having a user-friendly, sensible, but robust regulatory environment is an innovation in a way.
I find regulators in other countries are navel-gazing around some of these topics and are holding back innovation. In contrast, I think the BMA is a trustworthy partner for the industry and the Island in that. It continues to set the Island apart.
Huff: The most fertile ground for innovation is the move from peril to protection. Real innovation will come when we start thinking holistically about how we add protection and not merely indemnification.
There are some great examples in the cyber market. People are not buying cyber coverage. They’re buying cyber protection. They’re buying a whole suite of products around how to deal with the breach and how to improve your hardware, and software within your systems.
That’s where the innovation will come from.
We’ve talked about run-off already and the variety of innovations that may be available there to transfer portfolios.
It’s not just the new run-off companies that will be innovative. The legacy firms will want to peel off some business books to deploy capital to take advantage of new opportunities.
Finally, there will be real opportunities around climate change. Our business is the climate. The real innovation is that once companies and even individuals are aware of their climate risk, they will want to transfer that risk. And that’s where the innovation will come from.
De-risking climate risk creates real opportunities for our market.
Q5: WHAT ARE YOUR WIDER THOUGHTS ON ESG?
Dunleavy: Insurance is pretty much, by definition, ESG. I mean, it’s rebuilding communities, individuals, and lives. So we’re already there. We, I think, need to continue to evolve.
Champion: While our industry seems to focus on the “E”, I think some very exciting things are being built around managing the “S” and “G”. I further expect that they will dominate the next phase of talking points from an insurance perspective.
Noddings: We see a lot of innovation in the sector, especially around certain technologies such as blockchain and technologies that can be used to develop innovations such as smart contracts. A further step could be capital being tokenised.
All those concepts are going to come into play over the next few years as those technologies are embraced and encompassed to streamline the risk chain for all users. The BMA is at the forefront of all this—they embrace the future in the way they regulate their entities.
Britten: We are seeing many of our clients look at how climate change will impact pricing. What will my future pricing look like? We are in an industry that’s been very reliant on historical data; that will need to change, which is itself is going to require some innovation.
How do I think climate change is going to impact pricing for next year, five years, or 10 years down the line? I expect to see a continued investment of time and resources into that question.
Champion: Finally, I’d like to note that the Bermuda regulatory environment continues to innovate and we should give a nod to the digital asset space.
We’ve reached the point where genuine progress has been made, and there are some interesting companies in the BMA sandbox.
I fully expect that there will be Bermuda-based insurance transactions on a digital asset basis as early as 2022.
