Time to shine after the storms have passed
In attendance
- Brad Adderley, partner in the corporate department, Appleby
- Mark Allitt, director, KPMG in Bermuda
- Mark Berry, managing director and head of specialty reinsurance, XL Catlin, Bermuda
- Bill Dubinsky, managing director and head of ILS, Willis Towers Watson Securities
- Brad Kading, executive director, Association of Bermuda Insurers and Reinsurers
- Leila Madeiros, deputy director, Association of Bermuda Insurers and Reinsurers
- Greg Reisner, director, AM Best
- Jed Rhoads, president and chief underwriting officer, Markel Global Reinsurance
- Stephan Ruoff, chief executive officer, Tokio Millennium Re
- John Warwick, managing director and partner, ILS Capital Management
- Arthur Wightman, territory leader and partner for PwC Bermuda
- Moderator: Wyn Jenkins, Bermuda:Re+ILS
Bermuda has the potential to shine in the aftermath of the losses stemming from the hurricanes that have hit the US in recent weeks, in the way its reinsurers help clients and pay claims. These losses may also trigger further opportunities around closing the protection gap, something Bermuda has the potential to play a central role in.
The overall reaction of the market in terms of how pricing and capacity may respond is much harder to determine, especially in the context of so much alternative capacity now operating in the market by investors who may not have experienced heavy losses of this nature before.
Those were some of the conclusions of the annual Bermuda:Re+ILS Monte Carlo roundtable held on September 11 at the Fairmont Hotel in Monte Carlo and attended by 11 senior executives representing different parts of the industry.
The conversation took place in the context of hurricane Harvey having already hit the US causing substantial flooding. Hurricane Irma was approaching Florida—at the time of this discussion the storm looked potentially a lot more devastating that it eventually turned out to be.
How will Bermuda respond to the next big set of losses?
Jed Rhoads: We should first take a moment to say a quick prayer for those in distress including citizens and first responders. We should also remember that what we do for a living is support people in the aftermath of catastrophes like this. I feel Bermuda is uniquely qualified to provide reinsurance to places such as Florida and the Caribbean.
We are the single largest cat market in the world. We have a very strong capital base and good expertise to understand the risks we are managing. I also believe Bermuda has the right government from a regulatory point of view and is in a good position to provide industry leadership after what could be one of the biggest cat years we have seen in the US. I would also not be surprised if other storms follow.
Mark Berry: We sell a promise to pay and this is our chance to deliver on that promise and shine. I was lucky enough to be part of the formation team of Mid Ocean Re, established in the aftermath of Hurricane Andrew in 1992 which was followed by five years of catastrophes all over the world.
Bermuda then was evolving from predominantly a home for captives into becoming a premier domicile for risk-based capital, following the creation of ACE and XL on the liability side in the mid-1980s.
The market was recognising that Bermuda was the ideal domicile where companies such as Mid Ocean Re could be formed quickly and efficiently to respond to this devastation, especially as there was not enough available cover in the US or elsewhere. Other reinsurers, including RenRe, IPC Re and PartnerRe, quickly followed and the market has continued to evolve ever since. Bermuda is in an ideal position to continue growth because of that experience.
Stephan Ruoff: We are living through a period of big change in the industry with alternative capital coming in and Bermuda has been the leading hub for that. These events will test alternative capital and some could be rattled by it. Personally, I am confident that the Bermuda market will respond well again and these structures will come through stronger. It has been a great development for the industry and I think these new capital structures will help in the response. We recently moved our global domicile to Switzerland but we have kept Bermuda as our headquarters for cat business, alternative capital and analytics because of our confidence in Bermuda.
John Warwick: Bermuda has investor confidence. It has performed well since 1992, having evolved cleverly and not too fast since then. It will continue to do well. Losses are part of the business, and we have always paid out on those. Bermuda and London have always performed well, partly because of the experience of the people and investor confidence in those markets.
The question is if this will be an earnings or capital loss and whether people can reboot their capital. At ILS Capital, we are confident: we will be fully supported by investors now and going forward.
I have been with ILS for four years now, and investors have always asked what will change the market. We have always been cautious about that, but I know of a lot of funds whose investors are committed if this happens.
These recent storms will change pricing in the US market, but they will not change pricing in Europe or the UK. They may stop the slide but that is all. In some cases, people have increased their retentions and not bought enough because of the models. This will not change the base premium; when you look at growing markets like China and India, the base premium is not as strong as you might believe.
Could this trigger the next wave of innovation on Bermuda?
Brad Kading: These claims are opportunities to show the value proposition of reinsurance and of the value of our product to policymakers. Claims will be paid quickly and insurers will be able to trade forward because claims are paid.
Reinsurers can also help send signals to the market in terms of what the risks are and help improve risk awareness, health and safety and infrastructure safety.
We need to stop talking of impact on reinsurance stocks—no-one cares. They only care that claims get paid. We have to talk to policymakers on the value of the reinsurance support for these storms.
In terms of traditional capital versus alternative capital, we see it as all part of the same thing—our members are well integrated and use both.
Leila Madeiros: Hurricane Andrew was 25 years ago and Bermuda is stronger and has longevity and expertise since then. After a lull in storms making landfall, these storms could trigger some interesting conversations on risk and risk transfer and the big disconnect from policyholders and understanding how the claims process works.
If you look at Harvey a lot of people woke up in a flood zone when they didn’t realise they were in one. That leads to an opportunity to have some real conversations at insurance and reinsurance levels to see how we can explore opportunities to get it right and get it better so that people have the coverage they deserve.
Berry: If you stand back and look holistically, there is almost a bifurcation between the specific underwriting of risk and the capital to support it, and how each attaches itself and its value proposition to the policyholder and society at large. I hope that as we evolve risk transfer initiatives, each of these components develops its own efficiencies and continues to change things for the better.
Needless to say, getting capital returns is one thing but the world of risk is changing so fast. Our challenge is that where we could in the traditional underwriting of insurance, look backwards and evaluate risk, now we have risks so fast-moving that predictive analytics and other technologies are absolutely necessary to assess them. Cyber is a perfect example where we are trying to tackle the risk but with little historical data to work with. It is crucial that as an industry we help to solve this challenge.
Bill Dubinsky: As an industry we have developed technology in the last 10 years that can help in the immediate aftermath of a disaster and perhaps also over time help plug the disaster gap. That is an opportunity but also a threat if it is not addressed.
In terms of available capital we think it has an opportunistic ‘trade forward’ mentality. We see the existing ILS funds as well positioned to replenish capital quickly. But in addition, people are also asking about coming back in to the market—some who have participated before and some who are new.
There are so many more structures now and ways to skin the cat—there are easy and fast ways for them to enter the market.
Brad Adderley: This might have been a market-changing event once but if money comes in so quickly now, perhaps we will never see that type of scenario again. Investors will put money in Bermuda so quickly—it is a bit like a tap that can be turned on. Will there ever be a hard market again?
Berry: Again, if you step back and examine pricing over the last 30 years, it looks like a rollercoaster. We as an industry are definitely challenged on this—is it really the case that we need a hard market to pay for the market’s misdoings over the soft market? Or can we not just get pricing right near enough every year and have it hold so that it endures?
A kneejerk reaction every time events happen cannot be the best way to underwrite risk—we need to get the equilibrium right.
Warwick: Some clients want that rollercoaster.
Rhoads: After eight years of decreases what do they expect?
Adderley: But in which of those eight years was it the right structure and the correct price? Was it year one or in between or now?
Rhoads: Pricing is right wherever the pricing is at the time, but most would agree it’s very thin now.
Kading: The cost of capital reduced substantially in the soft market. But if people think the market will turn that is a wrong assumption because policymakers will not allow it. After hurricane Andrew government funds to take on hurricane risk were considered in 20 states and we campaigned against them. It is a challenge but policymakers will not allow rates to increase sharply.
Ruoff: Price is always a function of supply and demand. The important point is that the global insurance protection gap is too big and we need to work on increasing the efficiency in risk transfer. Twenty percent insured losses is way too low—and that is in the US, a country with the highest insurance penetration. The other issue is inefficient claims handling. Some claims take years to be settled. We can develop ways to become more efficient with technology. This is where the future lies: bridging and closing the protection gap.
Arthur Wightman: The protection gap is a property cat one—we are not even delving into other areas of risk transfer like cyber. It is also an interesting point on efficiencies. The fact is that reinsurers have long-term structural deficiencies especially in their expense ratios. They have continued to run heavy loads in organisations and had to endure a long period of soft market.
This is a massive opportunity for reinsurers to capitalise on new risks but to do that they have to innovate and also invest and collaborate. Reinsurers are in a strong position of opportunity but structural flaws impede their ability to take the opportunity.
Bermuda for many years has had a strong concentration of intellectual capital and providers have the opportunity to innovate. Sidecars and cat bonds and a vast array of different structures can be brought to bear—there are many types of alternative vehicles and new SPVs and ways put risk though the private market.
This market has so many great examples of innovation and agility in working through some of these trends but the issue needs to be solved quickly and technology is a solution to allow insurers to spend more on innovation and less on expenses.
Mark Allitt: The Bermuda market is here to respond to losses. We have track record on that. We have not been tested in recent years but if you look at the capital base of Bermuda, there is no question it can respond.
The market has changed: when there have been capital events in the past there has been hardening across the board and even failures. Things have changed. New capital appears to be more like a tap which should prevent a sudden jolt to the market. It will not be as significant as previously. We can rebound smoothly and more efficiently.
We feel very positive and optimistic about the strength of the market. Harvey has shown that protection gap—and the growth opportunities are massive. We are in a global market and opportunity is throwing itself at the market but the battle is how to respond.
Technology has revolutionised the industry but the challenge is you have to get on with day job—with technology it is all too easy to run down a rabbit hole, and the wrong one, so investment needs to be made with foresight in the right directions.
If the peaks in pricing are shaved from the market, what does that mean for the industry in the long term?
Greg Reisner: We have had a negative outlook on reinsurance sector since August 2014. Our concerns are around rate adequacy, the deterioration we have seen and the subsequent return profile.
We have always felt that the industry is well capitalised to respond to these events and we still feel that way. The flow of capital changes the dynamic of a hard market but Bermuda has always found ways to be innovative and find new risks and new opportunities.
We try to track those. That is where Bermuda’s value is—it can now bring third party capital behind it and fill the protection gap. The one answer I don’t have is how to change the culture and how to sell what people don’t seem to want to pay for. People don’t seem to want to buy flood insurance.
Rhoads: The NFIP purchased a test reinsurance placement in 2017, buying $1 billion of reinsurance—they must now feel it was a pretty good idea and had good value given the flood losses in the first year. Given the proof of concept that the private reinsurance market has value, we would expect them to return and make an even larger placement in future years. It partially protected the US taxpayer by shifting cost to the private market where there was a very efficient form of capital available.
Perhaps there is a need for the US government to provide some backing in some instances but that might only be a small portion of the total flood risks in the NFIP that are uninsurable.
Kading: I agree there can be great opportunity in flood coverage going forward possibly with third party capital as backing. But the issue is that a consumer buys an insurance product because of either risk awareness or a government mandate. The latter has strings attached and is not good for us. We need to work on the former and events like this help with risk awareness.
That is the better motivation for the consumer to protect themselves. You have to talk in a way a consumer can understand. If they buy a property there should be a better way of them to understand the risks to that property. If they have a 30-year mortgage, there is a percentage chance of a claim in that period, for example.
We also need to look more at parametric products—the California Earthquake authority tried one and it was rejected by policymakers. Products need to be tested but there is certainly evidence that these can work, and provide real value and immediate payoff.
Warwick: I have been working with parametric triggers over the past five years, teaching people how they work, but it is really hard to sell. The best thing about it is that people get paid in seven days, but it is still tough to sell.
Adderley: If you have to educate a person on the street to understand a product the chances of selling that goes down.
Warwick: When you look at it, there are currently $4 trillion of wind deductibles between Mexico and the North West. That is $4 trillion the market could tap into—an amazing figure. We have also paid losses all over the world to government schemes covering earthquake, flood and terrorism.
Rhoads: Many US citizens have become dependent on the government; they think the government will always pay for the loss. But really other states’ citizens are ultimately paying for those risks via government taxing authority and we need to raise awareness around that. We need to raise awareness that there is one tax base and there is plenty of private capital available for this. We have to get to the banks on board too.
The principal reason most California residents are not buying earthquake insurance is because the banks don’t require it for mortgages like they do for wind or flood in other states. I have to assume the banks and California residents are relying on the good nature of the federal government with its taxing authority from the other 49 states to assist in rebuilding homes post an earthquake.
Warwick: We have forgotten how to price peril; we used to have a price for everything and then it became one policy and we started to exclude things.
Kading: A lot of the big primary carriers are using technology to communicate with customers. No-one will read an insurance contract but maybe some people will watch a video of how an insurance contract works.
Dubinsky: I agree that consumer awareness is important but delivering the product in a more efficient way is also very important. If an insurance policy does not have exclusions it becomes simpler to understand and loss adjustment becomes potentially more efficient. Imagine if the situation with Harvey repeated itself with respect to a perceived coverage gap with a new product, whether mandated or not. There could be unintended consequences from the gap and government intervention could in the end potentially backfire.
Wightman: Consumers are seeking more flexibility than in the past and that is an opportunity. But it requires us to be much faster to price and deliver a risk to the market. As a hurricane comes in maybe we could have an app allowing people to buy cover for the next 20 days. Ultimately that is what people want.
Rhoads: Is anyone suggesting that so much capital is coming in that rates will go down further? I guarantee you if there were two category 4 storms, one in Europe and one in the US, we would talk a about ‘a rising tide floats all boats’. It would be the same if there were big events in Japan and Australia.
We are global reinsurers and we operate from one capital base. There is an interconnectivity of all clients around the world—all from one global reinsurance capital base. To assume the peaks and troughs have gone is incorrect—they are less exaggerated maybe but we still have them.
Kading: The challenge is that ideally there is a scientific price tied to the risk. But remember some of these lessons from the past the Florida legislature reconvened and doubled the size of the government reinsurance programme because cedants complained about price hikes. That is the danger of dramatic swings in pricing and the same danger is now on the NFIP. The government inclination would be to expand and support the current programme rather than rewrite it to accomplish reforms—but that is a challenge and opportunity.
How would this easy flow of capital affect pricing?
Rhoads: I don’t know the answer to what that tap of capital means, and I won’t speculate. We will have to wait and see. We have often been surprised in previous years when we have speculated about how much new capital flows in and out—I don’t think we know. Are we in new clustering environment where loads of events will come quickly? We are two events into a period when we could have seven or eight scaling events over a two-year period, like 2004/5—I would like to have this conversation in few years and then see.
Warwick: There is also the matter of what returns investors can get elsewhere. Our funds have turned a tidy profit they could not get elsewhere but investors will always chase the best returns.
Rhoads: If they see better opportunity elsewhere or if rates don’t rise to expected levels, they will go.
Wightman: That ignores the fact that some investors are in this space because of its lack of correlation. A vast array of structures have been developed and they will be tested now to see if they perform. There is evidence that when capital markets come to paying claims there is not the same willingness as reinsurers and that needs to be tested
Will advances in risk modelling and insurtech change the industry?
Rhoads: We are a huge believer in insurtech—Markel is involved in a number of initiatives into products bought on mobile phone, claims collected on phone and making it easier for millennials to access insurance.
There are many advances we as an industry can make in insurtech: I think it will start in personal lines then move to small commercial then large commercial then reinsurance—there is a natural progression.
Warwick: Bermuda is more agile than other markets in responding more effectively and more quickly. If you are in Lloyd’s, it might take 18 months to move into a new business line; in Bermuda, the process is much faster.
Ruoff: Our industry still spends some 30 to 40 cents a dollar in transacting business. Technology will change that and make it more efficient. We either embrace that change or technology will drive it for us. That is the first step towards getting the transaction costs down.
Berry: Reinsurers generally post quarterly earnings and given where they are you have to decide whether to invest now or wait until technology develops further. XL Catlin has been making these investments for the longer term.
Wightman: It is interesting to see how many carriers have these venture capital funds now. That has not always been the case. Technology will commoditise the distribution—that much is clear.
A report by PwC found that global investment in insurtech in the second quarter of 2017 surpassed that in the previous three quarters combined. Investment in insurtech by global insurers, reinsurers and venture capital firms surged by 247 percent to $985 million, compared to Q2 2016 ($398 million). In the first three months of 2017 there was $283 million of insurtech funding. PwC predicts the rate of funding and investment will continue at a similar level.
I would say it’s very encouraging to see that insurers and reinsurers increasingly view insurtech as an enabler rather than a competitor. A collaboration between experienced industry players and new ideas and technology will result in new products, reduced costs and more engaged customers
With reference to cyber we are close to getting understanding exposures and what people want to buy; that said it is complex with a big tail on it. A collaborative approach that brings together active threat intelligence and technical underwriting rigour holds the key to realising the full commercial potential of cyber risk.
Adderley: There will now be a fair amount of focus on Bermuda and to see us pay claims quickly will remind regulators of our benefits and that we are here to stay.
Berry: Bermuda has been built fit for purpose. We have the foundation in this environment to rise to the occasion after these terrible events and build not just hard capital, but also intellectual capital, and our ability to develop both of these quickly keeps us on the front foot.
Regarding the latter, between the Bermuda Insurance Institute and the Bermuda Foundation for Insurance Studies, we are proud to have so many of their graduates join the Bermuda insurance industry, who are now enjoying wonderful careers around the world. That is a fabulous testament to how fertile the Bermuda market has become.
Kading: I will close with a comment on regulation. Bermuda and Switzerland are unique in that their regulatory systems are accepted by the two largest trading partners in the world: the EU and the US. Bermuda has a robust regulatory regime while still allowing capital speedily to take up insurance risk. The regulator does a great job on Bermuda.
