Influx of new capital underlines Bermuda’s enduring appeal

07-12-2021

Influx of new capital underlines Bermuda’s enduring appeal

John Huff, CEO, Association of Bermuda Insurers & Reinsurers

A significant number of new firms have launched on the Island as more capital chases the attractive returns on offer, but what impact will this have? John Huff of ABIR suggests some answers.

As the re/insurance world—along with the rest of the global economy—emerges from the COVID-19 pandemic into a new business paradigm, it is becoming increasingly clear that the losses of the past 18 months, from both COVID-19 and a series of natural catastrophes, have done little to dull its appeal to investors.

Capital is continuing to flow towards the market in large amounts, with new startups and vehicles emerging on a seemingly daily basis. Bermuda has been at the centre of this boom, with an increasing number of companies opting to base their operations on the Island.

Speaking to the 1.1 Club, sister publication Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, John Huff, president of the Association of Bermuda Insurers & Reinsurers (ABIR), said the new players underscore how the Island retains its global appeal.

The past 18 months has been a time of significant disruption for the market. With the uncertainty of the pandemic and losses stemming from the closures of economies worldwide—as well as significant natural catastrophe events ranging from flooding in Europe to wildfires and hurricanes—the sector has taken a significant hit.

But amid this uncertainty, the overall macroeconomic environment of persistently low interest rates and growing concerns about inflation have meant that investors remain attracted to the re/insurance sector.

Huff said that Bermuda has attracted billions of dollars in new investment during this period, with a large number of startups plus more capital injections from existing players coming into the Island.

“We’ve seen some significant investment in Bermuda over the last year-and-a-half, with about $19 billion of new funds coming into the sector from startups and ‘scale-ups’. We’re seeing significant growth from our legacy firms that have been re-energised, with additional new capital being deployed.

“Some startup companies have chosen Bermuda for the usual historical reasons: it is a great place to start a new company, with a very responsive regulator, plus laws and language that conform to the English system. And of course, there’s the world-class talent—the most concentrated talent for re/insurance in about a 14-block space,” he added.

“We’ve seen some significant investment in Bermuda over the last year-and-a-half, with about $19 billion of new funds coming into the sector.” John Huff, ABIR

An opportune moment

At a time when many reinsurers are drawing a line in the sand after five consecutive years of price declines and losses, could this surge of new investment have a dampening effect on rates?

“That is too simplistic,” said Huff. “Investment has gone to the legacy firms, while many of the startups are going into specialty lines and niche types of business where the combination of talent and technology makes such a difference when it comes to capturing that business. There’s certainly adequate capital, and it’s a very opportune time to deploy it.”

Heading into the January renewals, the narrative across the industry has turned towards price rises, with many companies publicly stating that current rates are insufficient to deal with the risks that are being taken.

The market has broadly failed to meet its cost of capital for around five years, and Huff reckons that returns and pricing adequacy will be the most important themes as carriers sit down for negotiations over the coming months.

“The primary concern will be a return on capital and rate adequacy. These will both be viewed from the perspective of inflationary signs, and a lingering uncertainty on the economic environment that’s playing out globally. Of course, we’re starting from a much-improved and positive point for rate adequacy, particularly with compounded year-over-year rate and adequacy changes.”

For more content like this visit the Reinsurance Lounge

The other area he highlighted as one of the most important in renewal discussions was the growing significance of environmental, social and corporate governance (ESG) concerns from stakeholders and regulators, with scrutiny from all sides becoming a key driver behind more decisions.

Huff said that those considerations will impact companies on all sides of their business, with some difficult decisions to be made on both the underwriting and investment fronts.

“It’s going to be on both sides of the balance sheet: on the asset side, and where investments are made. Because of their large property portfolios, many of our members don’t have as much area for manoeuvre on that side of the balance sheet because they’re in very liquid funds.

“The Bermuda market’s value proposition is about responding quickly with liquidity needs for ceding companies on the reinsurance side.

“On the underwriting side, we’re still able to provide workers’ compensation, D&O and consumers with third-party liability coverage as jurisdictions transition to a net-zero environment,” he explained.

“The primary concern will be a return on capital and rate adequacy.”

Contract language

The plethora of claims emerging from the pandemic (and related economic shutdowns) and their impact on businesses has caused widespread uncertainty over some claims, many of which will be subject to long-running court cases. Huff highlighted contract certainty as a likely major issue for this year’s renewals.

Potentially vague language and a general loosening of terms and conditions over the last few years (to compensate for more challenging pricing) led to the situation that has developed during the pandemic, so it is likely that clarity will be on carriers’ minds when discussing renewals with clients.

“Clarity of contract has been such an important issue as we’ve gone through the pandemic. It’s important on the front end of the business, of course, for pricing and capitalisation.

“It also creates more business opportunities to ensure any coverage that is underwritten is properly priced. But it’s equally important on the back end of the business for reserving and claim adjudication, and the potential risk or any friction and frustration that you might have in the customer experience,” he concluded.

 

To view the full Re/insurance Lounge discussion click here

Association of Bermuda Insurers & Reinsurers (ABIR), COVID-19, Catastrophe, Insurance, Reinsurance, John Huff, Bermuda

Bermuda Re