The US continues to be the leading global market for Bermuda reinsurers. Here, recent developments in the market—model changes in particular—and that market’s undeniable and ongoing potential are explored.
The US continues to dominate re/insurance, like a giant standing astride an evolving global landscape. Premium volumes in the US far outstrip those of other markets, with insurance penetration and the litigious nature of the US legal environment helping the country to far outdo its geographic opposition when it comes to the affections of Bermuda and global reinsurers.
Indicative of the US’s leading position, Bryon Ehrhart, chairman of Aon Benfield Analytics, recently said that of the four leading pillars of reinsurance capacity, US wind and US quake accounted for the first two, with European wind and Japanese quake forming the third and fourth global pillars respectively. It is such dominance of the global market that sets the US apart, and in many respects Bermuda reinsurers were established in order to satisfy the risk appetites of North America, responding as they did to events such as September 11 through the formation of the Class of 2001, and Hurricanes Katrina, Wilma and Rita with the later Class of 2005.
As Susan Patschak, chief executive officer of Canopius, Bermuda, outlined: “Look at what is written in Bermuda. There was the directors and officers’ wave, the excess casualty wave, and then the cat wave, with all that desire for capacity emanating from the US. When you look at the insurance business that people are writing on the Island, it is high excess casualty and on the reinsurance side it is the property cat, and the majority of the split of business is US. When there is not enough capacity in the US, they come here first.” And despite moves to diversify their portfolios by geography, it seems that the US-Bermuda special relationship remains as ardent as ever.
Addressing the ongoing strength of Bermuda-US links, Edwin Jordan, chief underwriting officer and chief strategy officer at Tokio Millennium Re, said “The US is the number one insurance market in the world”, adding that at Tokio Millennium Re, US business accounts for more than 75 percent of the company’s premium income. Jordan said that going forward he had every expectation that the US market would remain number one for Tokio Millennium and the wider Bermuda market. Tom McEvitt, executive vice president, Bermuda and international reinsurance at Allied World, spoke in a similar vein: “From a property cat standpoint, the US absolutely does dominate global reinsurance. It drives most of those books of business down here in Bermuda.” He admitted that on other lines of business the Bermuda-US relationship is not quite as significant, citing Allied World’s decision to move its casualty business onshore, but it is evident that significant mutually beneficial synergies continue. Asked whether the US would remain a leading geography in the face of efforts to diversify by territory, Jordan was bullish about its prospects, adding that diversification by line within the US—in Tokio Millennium’s instance, into casualty—continued to offer significant potential.
Far from the ‘land of opportunity’
While the US market is undeniably significant, it is also a rather crowded one. Addressing opportunities in the market, it was evident from speaking to both Jordan and McEvitt that developing a niche in the market is difficult. As McEvitt outlined: “It’s pretty tough to say that there is any line of business in the US that you can really pinpoint as representing a great opportunity.” He said that due to Allied World’s relatively small property cat book, the company sees an opportunity to expand this particular line of business “because we know we have the capital and appetite to grow that book”, but on other lines which Allied World is looking to develop, McEvitt described its efforts as a “slow trudge”. He concluded that while there weren’t specific opportunities at present in the US market, it is nonetheless about “keeping your eyes and ears open” in order to identify possible openings.
Jordan said that from a profit perspective the present soft cycle is providing few opportunities in the US space. However, he said that Tokio Millennium takes a rather more long-term approach to its strategic growth, indicating that “casualty is an area where we can grow and diversify our property cat book” with efforts already underway to develop a presence onshore. Jordan agreed that casualty rates could be described as “bumping along the bottom”, but added that once Tokio Millennium has its personnel and infrastructure in place onshore, the reinsurer would be able to take advantage of a likely turn in the casualty market. With rates as low as they are and with the investment environment decidedly troubled, conditions may yet coalesce in the coming year or so to turn the casualty market in the US, he said.
A telling effect
Recent changes to RMS’s US hurricane models have had a telling effect on US pricing this year, with some in the industry describing the new modelled assumptions as ‘Hurricane RMS’. Rates on US property cat rose by 5 to 15 percent at the mid-year renewals and it is evident from talking with those in the industry that the full impact of changes to pricing and risk assumptions are still to be played out. Touching upon RMS’s new version 11, Jordan said that the new models had resulted in “dramatic change” on US property cat pricing, adding that modelling firms would need to be “more transparent and to communicate better with the industry” regarding future model developments. He said that Tokio Millennium had sought to implement model changes based on early communications from RMS, “but in some cases we were really off, as exposures did not turn out the way we thought they would”.
Instead, RMS’s US model changes left many in the industry floundering with, in some cases, dramatic upticks in modelled loss assumptions. However, Jordan admitted that firms should not simply rely upon modelled assumptions, but rather should test and interpret them themselves.
"Most companies are down to street level data-- you just don't get that in other parts of the world, and particularly not outside of Europe.
McEvitt similarly indicated that recent RMS model changes had been significant, stating that “very few people weren’t surprised by the results”. However, he said that “from an average annual loss and probable maximum loss standpoint, the changes have been more considerable for ceding companies”. For reinsurers the change in pricing has been “far less dramatic”. However, McEvitt agreed that individual companies had experienced “very large changes” to their expected loss exposures, creating an evident knock-on effect upon US pricing. Patschak agreed that “real change won’t be as significant as the RMS models suggest, but it will be a major factor at January 1 once everyone gets their arms around its various pieces”.
Addressing the data and assumptions of US models, McEvitt said while people don’t “necessarily believe the models to be exactly correct, they are more comfortable with models and results for US events”. He said that this was due to the granularity of the company data reinsurers receive from ceding companies in the US. “Most companies are down to street level data—you just don’t get that in other parts of the world, and particularly not outside of Europe,” McEvitt said.
Turning to the need for model changes to be reflected in rate increases and those discussions that the industry is being obliged to have with ceding companies, McEvitt described rate increases as a “tough pill to swallow”, particularly when cedants exposures have stayed flat and yet they are “asked to pay or buy x amount more reinsurance”. He said that US brokers did a good job in explaining the increased exposures outlined by the new model changes during the year, but McEvitt said that “the one thing that you know is accurate is the exposures—and they haven’t moved from year to year—so just because a switch was hit last night and the results have now doubled, it doesn’t mean your exposure has doubled”. At the same time, he said that some companies “flat out couldn’t pay the extra amount” outlined by the new model assumptions. They understood the new exposures, he said, but they simply could not buy up to the amount that RMS had outlined.
Jordan agreed that “nobody wants to see their rates go up—and particularly not just because of model change”, but added thatupward rate movements on the back of RMS version 11 were pretty inevitable. However, he said that while everyone expects rates to rise for US wind, “they just aren’t rising to the same extent that expected losses are as a result of the recent model changes”.
Hurricane Irene—a limited driver
Paradoxically, the most headline-grabbing wind event of this 2011 hurricane season, Hurricane Irene, appears actually to have had less of an effect on US property cat pricing than its counterpart, Hurricane RMS. As Jordan indicated, the event is not going to have any real effect on rates. Rather, its significance is its impact upon perceptions. As Jordan outlined, Tokio Millennium was watching Hurricane Irene unfold “very closely, because we have a lot of exposure in the North East and some of our worst scenarios involve a hurricane heading straight up through Manhattan. It definitely made people aware that a cat that far north was possible”. McEvitt was more confident that the event would play into pricing, although he said that the US would have experienced upward movement on reinsurance pricing even without Hurricane Irene. As for the North East, he said that even though it had not really suffered a significant hit, the event “has planted the seed that there is a real exposure there and maybe there will be less push-back on rate increases there” going forward.
The US: a market apart?
There is sometimes the impression that the US is a market apart, with both its size and maturity shielding it from international developments, but not everyone agrees on its unique standalone nature. While Jordan said that “the only thing that changes US pricing is US events—and possibly model changes”, McEvitt argued that while he used to believe that such a situation was true, and that he had even stated the case that “the US impacts global pricing, but that big global events fail to affect US pricing” only last year, he regarded such an assumption as being no longer the case. “After the Japanese quake—and almost immediately— we saw rates firming and increasing, even at April 1 in the US.”
He said that there was an immediate impact on US pricing following first quarter losses, with “people taking another look at their US aggregates, and whereas they had been looking to grow in the US, they have started to rethink this”, particularly as they entered the wind season. Perhaps a more globally linked cycle of pricing is possible.
Expectations for 2012
Finally, outlining expectations for 2012, both Jordan and McEvitt said that hardening was on the cards, with both RMS and international catastrophe losses playing their part. As McEvitt outlined: “I was expecting hardening irrespective of Irene”—not in the range experienced post-Katrina, he admitted—but rates are going to “keep ticking up”. Jordan said that he expects property cat rates to go up “another five to 24 10 percent in 2012” adding that with casualty “bottoming out, we are probably expecting flat to hopefully plus five” in the coming year.
Turning to US pricing within the wider global context, Jordan said that “US business continues to be adequately priced, whereas if you look at rates in a lot of other jurisdictions they are not”. McEvitt echoed Jordan’s evaluation, arguing that “following first quarter losses, reinsurers have asked whether they are getting adequate rates in those areas hit by losses, and in some cases shifted their attention back to the US and Europe”. It would seem that despite the competitive market and limited opportunities that characterise the US market, its pricing environment is still favourable for Bermuda players within the wider global context. The US looks unlikely to lose its top spot, or Bermuda’s affections, any time soon.
A US presence
Tokio Millennium made clear in Monte Carlo this year its intention to establish a presence in the US, with both Edwin Jordan, chief underwriting officer and chief strategy officer at Tokio Millennium Re and the firm’s chief executive officer, Tatsuhiko Hoshina, indicating that Tokio Millennium’s strategic ambitions would include a move onshore. Addressing the likely move, Jordan said that the firm had been considering a US presence for some time, but that recently “it had become more of a priority”. He said that as the firm has sought to develop its casualty business, so the importance of having a US presence has become apparent.
“From Bermuda we are not able to underwrite and carry out claims audits on a regular basis, so it is important to us to have a US presence so that we can get closer to our casualty customers and more easily expand our service,” he added. “The other issue is collateral. Collateral for casualty lines stays up for a long time and as you are writing the line, it accumulates, so it would be very difficult to write the business from Bermuda.” Asked how Tokio Millennium intends to differentiate itself from the opposition, Jordan said that the company’s strengths were its “long-term view of business and development—that’s the nature of a Japaneseowned company—and our strong financial strength”.
Finally, addressing the recent uptick in US pricing due to RMS version 11, the bottoming out of casualty rates and the likely effect that Hurricane Irene will have on perceptions concerning North East hurricane risk, Jordan admitted that Tokio Millennium’s “timing for expansion is working out well”. A move into North America may yet prove fortuitous.
US, Bermuda, reinsurance, RMS, Canopius, Tokio Millennium Re