Reinsurance down under


Reinsurance down under

Australia and New Zealand are an attractive prospect for many Bermudan reinsurers seeking diversification—and despite the large losses of 2010 and 2011 they have remained committed to the region. Bermuda:Re+ILS finds out why.

The significance of Australasia to Bermudan reinsurers—and, equally, the importance of Bermudan reinsurers to Australasia—should not be underestimated.

Bermudan re/insurers covered 51 percent of the reported liabilities for New Zealand’s aggregated 2010 and 2011 earthquakes.

As well as New Zealand quakes, they have also played a significant role in covering Australian bush fires, cyclone and flooding.

“Post-quake they sent disaster teams in to better understand the fault zone in New Zealand, to better understand the liquefaction in the Christchurch area and to understand building codes and what can be done on new construction,” says Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR).

“The big catastrophe reinsurers want to be active in Australia and New Zealand. They paid a lot of claims and they remained committed to those markets, so the large Australian insurance groups are very large purchasers of reinsurance and the Bermuda reinsurers are well represented in those reinsurance programmes.”

Benign but unpredictable

Following those losses, the market has entered a fallow period. According to KPMG’s 2014 General Insurance Industry Review report on the Australian insurance market, in the absence of natural perils the reinsurance market has continued to soften in the 12 months to June 30, but reinsurance costs increased slightly in the year as insurers restructured their programmes to address the natural perils horizontal requirement imposed by the Australian Prudential Regulation Authority’s Life and General Insurance Capital (LAGIC) regime since January 1, 2014.

“Net claims costs were consistent with the prior year as the benign catastrophe environment has continued and interest rates, while remaining at historical lows, have remained stable,” the report notes.

“With the growth of earned premiums and a stable claims environment, the current year loss ratio of 61.6 percent is at its lowest level of the last five years.”

“It works not just in Sydney but in the US and Europe—the small to mid-sized companies tend to be able to give them solutions more easily.” Tatsuhiko Hoshina

The region is nothing if not unpredictable, with the next big loss possibly looming. With its exposure to catastrophe risk, the region is a perfect fit for what Bermudan reinsurers do in terms of serving highly developed insurance markets with products to protect ceding insurers’ balance sheets from cat events.

Another attraction the region holds for Bermudan reinsurers is that Australia and New Zealand have well developed insurance markets with high penetration.

“Australia is a kind of an outlier, but we’ve had a lot of growth there and it is an established marketplace—the only one really in Asia Pacific outside of Japan,” says Catlin CEO Stephen Catlin, who established an Australian operation over 10 years ago. “The rest of Asia-Pacific is essentially emerging markets as you see in Latin America.”

On top of that, Australia and New Zealand also provide diversification benefits.

“Bermuda’s reinsurers really need to have a diversified portfolio of risk around the world to get the diversification benefits on the capital deployed in the area, so it is important in the highly developed insurance markets for companies to know how to underwrite, and how to manage risk exposures and gain the benefits of diversification from those risk exposures in Australasia,” says Kading.

A balanced book

Tokio Millennium Re (TMR) is an example of such diversification in action. The company opened an Australian branch in March 2011, with Russell Brooke heading the operation.

“It’s going very well for us in Australia,” says CEO Tatsuhiko Hoshina. “Despite the softening of the market we have been able to have a very balanced portfolio—we have property, casualty and specialty—so it is very well balanced. Probably among all the entities that we have—London, Bermuda, the US and Sydney—it is the most balanced portfolio-wise.

“Sydney is doing a very good job of diversifying our portfolio. It’s a very lean operation; we have five staff there, but since day one it has performed better than the business plan. There are limited opportunities out there and having people on the ground is really helping us develop our footprint in the Australian market.”

Despite enjoying so much success, Hoshina has no illusions about the challenges the Australian market presents. However, he believes the key to success lies in adapting to clients’ needs.

“It is a tough market: we have large reinsurance companies come in, take a chunk of the capital and get out, so it’s very competitive but we have very good staff there led by Russell Brooke. He has a very close relationship with our clients, hearing their needs and providing them with solutions.

“That’s the key to growth: listen to what they say and try to provide a solution. It works not just in Sydney but in the US and Europe—the small to mid-sized companies tend to be able to give them solutions more easily than the large companies—and our focus is on tailor-made products.”

Australasia, earthquakes, ABIR, Catlin, Tokio Millennium Re

Bermuda Re