The future looks bright for the long-term sector

The long-term reinsurance sector in Bermuda is in good health and currently faces a host of growth opportunities, according to panellists in a roundtable discussion hosted by Bermuda Finance to explore the current position and prospects for the sector.

Patrick Kelleher, former chief executive officer, Somerset Re, cited several statistics that highlight this growth: since 2014, the number of licensed commercial insurers increased by almost 50 percent and the number of class E insurers (the largest and most capitalised) more than doubled from 20 to 45.

“Over the same period, the insurance-related assets under management increased from $150 billion to approximately $500 billion, primarily due to an increase in class E insurers,” Kelleher said.

“Consequently, the long-term sector on Bermuda is much larger than it was just five years ago. Meanwhile, membership of Bermuda International Long Term Insurers and Reinsurers (BILTIR) increased by 68 percent over that five-plus year period.”

According to James Bracken, chief executive officer, Fortitude Re, the background to all of this is the US life and annuity reinsurance market, where “significant transactions are happening as traditional holders of large blocks of life and annuity reserves are figuring out that it doesn’t make sense to hold some of these reserves on their balance sheets”.

As a result, there are a lot of sponsor-backed platforms—Fortitude Re being one of them—which are better homes for those liabilities due to their ability to source higher returning assets.

“Consequently, we are seeing a lot of blocks changing hands and moving to newer enterprises, and those newer businesses are choosing Bermuda as a primary locale. This is because of the strong regulatory environment, EU Solvency II equivalence, US National Association of Insurance Commissioners reciprocity, the quality of the people you can hire on the Island, and its business-friendly outlook,” Bracken said.

He highlighted other drivers, including low interest rates and changes in accounting requirements.

Diversification

Thomas Olunloyo, chief executive officer, Legal & General Reinsurance, noted that the diversification of businesses—for example, by product or by location—reflects why Bermuda is such a viable market in the long term.

“It is not dependent on any one market for its business or its assets, so that breadth of experience drives the growth of the market and makes it strong,” Olunloyo observed.
Amy Ponnampalam, chief executive officer, Athora Life Re, agreed that geographical diversification is a key theme and noted that there has been “an explosion of interest from the whole world in terms of Bermuda as a place for long-term business”.

David Howell, chief executive officer, Pacific Life Re, added that diversification is also about the business model: some BILTIR members have a high-net-worth retail strategy or use the traditional reinsurance model, which is more about long relationships. Others, meanwhile, are more transactional, with a pension risk transfer (PRT) or acquisition focus.

“These are quite different business models, and they play a role in the way we see ourselves as long-term reinsurers,” Howell noted.

Looking to the future, Bracken sees advantages coming from the fact that the perception of Bermuda as a tax haven is waning.

“That has been immensely helpful, and as we hope for decreasing regulation and protectionism from many governments around the world, it can only increase the flow of assets and risk into the Bermuda market,” he said.

Regulation

Discussing Bermuda’s regulatory environment, all panellists praised the Bermuda Monetary Authority (BMA) for the way it has evolved over the past decade.

“I have been affiliated with Bermuda-based companies for more than two decades and from my experience the BMA has high-quality people who are deep in the insurance business and understand the regulatory and supervisory aspects,” said Kelleher.

“Overall, I would say they could go toe to toe in terms of regulation and supervision with the best in the world at this stage,” he added.

Looking at market conditions, Olunloyo highlighted the fact that with interest rates and spreads where they are, there is increasing focus on illiquid assets where the wedge between liquid and illiquid asset returns is narrowing.

“However, being able to find that right yield becomes even more difficult, which creates its own challenges,” he said.

“In 2020, at the height of the first wave of the COVID-19 pandemic, corporate bond spreads blew out significantly. That was a great time to be looking to shift PRT liabilities—we saw a lot of transactions in the UK.

“Obviously, spreads have grown tighter since then and we’re back to the chase for yield. I expect that will continue to be the case going into 2021.”

Ponnampalam said many international insurance companies are considering refocusing where they deploy capital and shedding parts of their business that may be trapping capital they cannot afford in the current environment.

“Illiquid assets are an interesting asset class, specifically for life companies, as they are very important to us over the long term,” she said.

“Reinsurance clients are very curious about illiquid assets: what they are and how we think about them in developing our investment strategies. The experience of COVID-19 is going to test how effective and transparent our valuation principles have been when it comes to these assets.

“I am talking about asset classes such as commercial mortgage loans, residential mortgage loans, and private credit—assets that are not publicly traded. These are assets which have been marked to model and valued using fundamental analysis, and in an environment like the one we’re in today, it can be more challenging to validate those model inputs and to know whether those assumptions make sense or not.”

She added that those who have invested very heavily in illiquid assets are watching and waiting at the moment.

Pandemic effects

Discussing the impact of COVID-19, Howell said that while traditional life reinsurance has seen more claims, the nature of the pandemic has not been as bad as the models predicted.

“We normally model impacts which are just a flat extra rate of mortality for all lives, but this is more like a multiplier which hits younger ages less and has been more mitigated by underwriting,” he said.

“And, of course, we do cover a lot of longevity risk, so we’re seeing an offset there. We might not have fully anticipated how much the economic impact of the pandemic would affect our disability book, so we have some extra losses coming through from that line.”

Martin Laframboise, chief risk officer and head of reinsurance, Sun Life Financial International (SLFI) said that it has been a challenging year, with the low interest-rate environment causing pressure on product profitability across the industry and a pandemic-induced downturn in high-net-worth business globally—except for SLFI, which had seen significant growth during 2020.

“It has been challenging, partly because of COVID-19 and partly because serving our clients in a non-face-to-face environment has meant implementing more innovative business contingency plans,” Laframboise added.

In terms of opportunities, he highlighted that high-net-worth life insurance is a continued area of focus for SLFI.

“Globally, the growth has been almost double digits, so keeping up with that is a challenge,” he said. He added that SLFI is continuing to grow and diversify its global presence in high-net-worth markets, including Asia-Pacific and emerging markets such as the Middle East.

Howell said that prior to the pandemic, Pacific Life Re and the wider industry were focused on growth in Asia—and that is set to continue post-COVID-19.
Pacific Life Re also has growth opportunities in continental Europe where it has very low penetration—and possibly Latin America, depending how it comes out of the COVID-19 crisis. In the longer term, Africa presents further opportunities.

“In an age of COVID-19 where the world is changing so much (not just in terms of mortality rates), there is a real opportunity for reinsurers to add value in terms of our understanding of risk, as well as communicating that more broadly—not just to our customers, but beyond that too,” Olunloyo continued.

“The importance of reinsurers is going to come to the fore, because we have some of the best risk management experts in the world. We have the opportunity to share this expertise and, ultimately, that will drive more activity and more growth in our business around the world—and, of course, here on Bermuda.”

Bracken agreed, adding that most of the sponsor-backed platforms have an opportunity to build, to continue a flow of reinsurance business and bring it to better homes where specialised reinsurers can price the risk, oversee asset/liability management issues and source better, more applicable assets to back those liabilities.

“We will continue to see a good flow of transactions into specialised reinsurers and it will free up capital in those primary direct writers, allowing them to focus on distribution channels, product innovation and policy servicing,” he said.

“In short, I think you are going to see a continued shift of insurance reserves to specialised players.”