Invest, adapt or be left behind?


Invest, adapt or be left behind? / anthonyjhall

Identifying future moves in the market for a place such as Bermuda is always an interesting process. Bermuda:Re+ILS eyes the current trends.

The Island, perched as it is between the US and UK, has its own unique set of circumstances—but it is always affected by headwinds coming from many directions.

Recent months have been dominated by the weather of course, as everyone looks carefully at the amount of damage that has been inflicted by a string of hurricanes. Harvey, Irma and Maria have all carved their way through the market, inflicting catastrophic damage on a wide area. The exact results and implications they will have on the market remain to be seen, but it would be true to say that a lot of people have received a rude reminder of the cost and impact a truly severe hurricane season can have on the market.

Long-term financial trends will certainly be scrutinised closely in coming months. According to data supplied by Fitch Ratings the financial performance of Bermudian re/insurers has not exactly been stellar in recent years. According to Fitch, combined total return on equity for 2015 and 2016 was down on the figures for 2013 and 2014. Combined ratios have also been heading upwards—and where they will end up when the 2017 results are announced will be an interesting result.

More mergers?

Of course, there are other trends, albeit the harder to predict ones. The question of what recent events will do to balance sheets brings up another possible trend—merger and acquisition (M&A) activity. Two years ago M&A was all the rage as companies eyed each other up and prepared to tie the knot. Is there much scope for more of this activity?

AM Best certainly thinks that this might be a possibility. In a special report published at the start of September, Down but not out: reinsurers look to reposition amid market disruption, the rating agency says: “With tough market trends and competition, conditions remain ripe for M&A to continue over the next few years. Companies are flush with capital, borrowing is still relatively inexpensive, opportunities for organic growth are limited and some companies are struggling to cover the cost of capital, which puts M&A on the table.

“We believe the Bermuda market is under the most pressure, given the market’s rather anaemic return on equity of 6.8 percent for 2016.

“Initially, as the market softened, many companies shifted into primary lines in a more significant way. However, the majority of profit for many reinsurance companies with primary business is still coming from the reinsurance side, even while the primary results are around break even.”

According to AM Best, the M&A activity in 2015 was mostly aimed at gaining scale or building a broader market footprint, such as the XL/Catlin and RenRe/Platinum deals. However, the rating agency thinks that the current M&A trend is leaning towards finding a home in a larger organisation, where a company can be nimble and have autonomy, but still have some parental protection, such as the Endurance/Sompo and Allied World/Fairfax deals.

The rating agency concludes on a note of some doubt: “Amid the considerable uncertainty as to the timing and what exactly it will take to turn the market, the one certainty that remains is that reinsurers will have to continue to evolve, learning from their mistakes and successes. No doubt there may very well be some surprises that come along with that evolution.”

Bring on the tech

Other trends in the market tend to be along the lines of the usual suspects. Technology remains the topic of many conversations, even if the terminology used keeps changing based around the latest developments. Insurtech is on many people’s lips, as is cyber.

Law firm DAC Beachcroft certainly thinks that insurtech is a topic of much discussion at the moment. It devotes much space to this area of the market in its latest Insurance Market Conditions & Trends 2017/18 report.

According to the report, previous mentions of big data sound almost old-fashioned, with the new discussions being around artificial intelligence and insurtech.

The latter is provoking quite a bit of uncertainty, DAC Beachcroft points out in the report, with one estimate of the amount invested globally into this area being around £1.32 billion.

“It is on everyone’s agenda, but how it plays out will vary enormously,” says Mathew Rutter, insurance advisory partner at DAC Beachcroft. “No-one quite knows where the smart money should to be going and what is going to take off.

“Large insurers have created digital garages to accelerate development and that seems to be working well. But there are also plenty of small insurance startups that could develop niche products. Their lack of size might enable them to move very quickly.”

DAC Beachcroft thinks this is not an area to be ignored. “Trying to stand aside from this rapid evolution is simply not an option,” Rutter says in the report.

“Part of the issue for insurers is that even if they don’t invest and adapt they will need to respond to the technologically driven changes around them such as driverless cars. It is hard to see old business models being fit for this new world.”

That’s always been the biggest problem with trends: they can affect everything around them and ignoring them can make you seem short-sighted—or worse. Bermuda needs to keep one eye on the horizon and the other on its immediate vicinity. Eyestrain is a fact of life in our industry.

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