S&P: Bermuda may become victim of its own succes

Despite increasing competition, persistently low investment yields, and a lethargic rate of economic recovery in the US and Europe, Bermudian re/insurers achieved strong earnings in 2013, but results may prove a mixed blessing.

This is according to a Standard & Poor’s report entitled Barbarians at the gates: Are Bermudian (re)insurers victims of their own success?

Thanks to mild catastrophe losses and favourable prior year reserve development, the 20 participants in the annual survey had a combined ratio of 85.6 percent, an improvement from the 91.5 percent achieved in 2012, and a return on average equity of 12.9 percent, up from 11.4 percent the previous year.

Strong underwriting and operating performance has strengthened reinsurers’ risk-adjusted capitalisation, but this will likely create long-term pressures on rate. According to Aon Benfield, as much as $100 billion of alternative capital could flow into the reinsurance market over the next five years.

As a result, traditional reinsurers are already competing furiously in an attempt to deploy capital and third party capacity is creating further issues.

Insurers are meanwhile streamlining their reinsurance spend, further exacerbating the competitive dynamic.

"We think that companies without a defendable competitive position, or those that are more aggressive in maintaining market share by competing on price or relaxing their underwriting discipline, are most at risk," notes Gharib.

"We could revise our assessment of those (re)insurers' business risk profiles to reflect the relatively higher risk. In addition, we believe Bermudian (re)insurers with diminished capital buffers, or those whose earnings capacity is persistently constrained, could face rating pressure."