Boring renewals, but dynamic times on Bermuda

Bermuda’s re/insurance executives appear to expect a relatively uneventful renewal as negotiations get into full swing ahead of the  January 1, 2019 renewal. But they are grappling with many other issues, including alternative capacity, consolidation and the importance of diversity—all of which could have significant long-term implications for the industry.

That is a broad overview of the inaugural Bermuda:Re+ILS renewals survey, in which we surveyed a selection of Bermuda’s risk transfer professionals about their thoughts on trends, topics and priorities during this renewals season.

The consensus from global industry reports seems to be that, while rates did harden in the January 2018 renewals, the extent of the increases were less than expected by reinsurers and, what is more, this momentum has been gradually dampened throughout the year.

Broadly, Bermuda’s executives reflected this trend in their answers to our survey—albeit with slightly more pessimism than some of the wider market reports have suggested. Asked about their expectations for pricing in the next renewals, 31 percent said they expected stability, an optimistic 21 percent said they expected to see some further hardening while the majority actually suggested a softening could take place—countering the positive increases seen last year.

Few reflected much anxiety about this state of affairs. “The pluses and minuses will even out,” one respondent said. Another added: “The industry needs to change, and rates are inadequate in many areas. But structural change is needed. Worrying about the odd percentage point here or there makes no difference.”

Loss of control

The biggest influencing factor in the state of rates appears to be the influence of alternative capacity on the market—and the heavy losses from catastrophe losses in 2017 remain a big part of the negotiations taking place. More than 50 percent of respondents said alternative capacity yields a big influence on this, whereas only 16 percent suggested competition from other reinsurers was to blame.

The 2017 losses are clearly important. Some 21 percent of executives said these would influence renewals negotiations now, compared with only 14 percent who suggested losses from Hurricane Florence and other 2018 events would have a bearing on rates this year.

Some respondents suggest that alternative capacity would be selective about where it wanted to operate. “Reinsurers backed by alternative capital will drive competition based on individual programme merits,” one respondent said.

Others bemoaned the overall effect this form of capacity has had on the market.

“It is a fantastic tool for reinsurers in many ways, but it has also meant the true carriers have lost control of the market and are being buffeted by forces bigger than they are, and beyond their control,” said another.

“I am not sure where this all ends, but I guess someone will still need underwriters.”

Consolidation

Amid the dynamics around renewal negotiations, consolidation is an increasingly important topic as cedants try to establish whether the re/insurance groups they work with might be merged or become part of different entities in 2019. While not perhaps their most pressing concern, it becomes more pertinent every time a new deal is revealed.

Perhaps this is because Bermuda is the home of the reinsurance startup, but executives on Bermuda seem to have a different perspective on this from that of executives globally. The consensus of global surveys seems to be that the market is, and will become, more tiered with fewer, bigger players dominating.

On Bermuda, however, only 14 percent said they felt there will be fewer players. While 37 percent agreed there will be more tiering, 49 percent suggested that all this will in fact leave room for smaller companies to enter the market and grow market share. Some linked this to the changes in capital in the market. “The number of decision-makers on behalf of risk taking capital will continue to increase,” one said.

Others saw this as a more straightforward equation. “Big fish: don’t eat small fry,” said one respondent. “As these players get bigger, who will service the smaller cedants, the niche players, the ones with bespoke needs but which are not that big?

“It is the natural evolution of any business sector. Plus, there will be an overspill of talent from within these mergers. Some of these individuals will look to venture out alone—or help existing niche players target new areas.”

Taking all this into account, perhaps it was no surprise that the biggest talking points during this renewals, according to our survey, will be: rates; the role of alternative capital; and consolidation. These were the top three factors picked by respondents; fears of more losses during the 2018 hurricane season barely featured.

“More capital will look for entry points keeping the market competitive,” said one respondent, who selected alternative capital.

“M&A is an important one; some panels will need to be rebalanced based on the counterparty risk dynamic,” another said.

Let Lloyd’s bleed

The survey also asked executives to comment on some of the specific current events and trends in the industry. It is well documented, for example, that Lloyd’s is conducting a profitability review, which has the potential to stymie lines of capacity, force syndicates to rethink business plans and even close some where no clear route to profitability can be mapped.

This is a big deal in Europe at the moment—and it appears its implications are not lost on Bermuda executives, with many seeing it as a potential catalyst for the market’s overall profitability and also potentially generating some opportunities for Bermuda players. Some 64 percent said it might trigger more discipline, and almost 30 percent said it might mean opportunities.

“There will be some impact to the tighter side but not enough to drive major change,” said one respondent, suggesting that the Lloyd’s review could be a positive force, but to a limited extent.

Others were more bullish. “To be honest, Lloyd’s was losing its grip on many sectors anyway; my view is let them self-destruct. Places such as Bermuda will happily take market share and, with our lower cost base, turn it into better business,” was one opinion.

The pace of change

We also asked for views on the potential impact of insurtech on the market. There has been an element of cynicism emerging in some quarters: after several years of hype, some executives are starting to wonder when the insurtech revolution will finally materialise.

Executives on Bermuda seem positive it will make a difference. While 28 percent were nonplussed on its ability to change the industry for the better, 43 percent said it is already making a positive difference and 29 percent agreed it will completely change the industry—the only question being, how soon? Some also suggested that traditional players need to ensure they keep pace with change.

“Talk will evolve to action on several fronts over the next couple of renewal cycles,” said one respondent, clearly energised by the plethora of technology emerging intro the risk transfer world.

Another added: “This industry will look completely different in a decade. The two biggest insurers of the future will be Google and Amazon and we will all be mere service providers. We will look back at this time and wonder why we didn’t embrace some of these technologies sooner.”

There were also cynics. “It is a bubble and it will burst,” one said. Another added: “Yes, the entire world is being changed by technology but just because someone coined the phrase insurtech does not mean ugly ducklings suddenly become swans.

“Many of these companies are way overvalued; many insurers and reinsurers that have invested will have been ripped off.”

In the context of the Bermuda government’s passing legislation to encourage companies backed by or using cryptocurrencies to do business on the Island, we asked respondents what they made of this. While 36 percent suggested it might aid the Bermuda economy, far more were nervous. “There is too much money-laundering behind it,” said one.

Ticking the box?

One of the most pertinent issues on Bermuda in recent years has been diversity, and the risk transfer industry has made great strides to ensure career paths are available for all on the Island. Numerous programmes have been launched and many companies have kick-started dedicated initiatives.

It might then be a surprise that more than 70 percent of respondents said they still do not believe enough is being done; only 16 percent said they believe enough is being done, while 12 percent said it is a non-issue and that the industry should worry about other things.

One respondent suggested more could be done but added: “This is an industry issue and Bermuda is further along than other markets.”

Another added: “I acknowledge companies have made a start but there is a long, long way to go. Many of the issues are very deep-rooted and cannot be easily solved overnight. It could take generations.”

Of the handful that dismissed lack of diversity as a problem, some said they felt the industry was tackling this for the wrong reasons and in the wrong way.

“Companies are taking corporate responsibility increasingly seriously but it becomes a tickbox exercise that can end up discriminating against people in a different way,” said one.

“My view is that times have changed, opportunities are available. But we just want the best person for the job. Don’t tell me I have to think about anything else—it is just confusing!”

That said, only 7 percent suggested the industry is already open to all based on ability—and 15 percent said they felt it was a red herring. The rest suggested that either it would benefit the industry by bringing better talent in, or that it was simply the right thing to do.

“In Bermuda in particular, it is important to get this right. But my hope is that we will also generate the best possible pool of talent because of it,” one respondent said.

Another added: “The focus of the efforts is wrong. We should strive to change the industry culture, not to incentivise specific groups,” one said.

Another said: “It is the right thing to do because it will create a better talent pool. It will matter but over a long horizon.”

On this note, the industry was broadly supportive of government-led initiatives to attract more young people into the industry. Almost three quarters suggested the government was doing a good job on this front.