Facilitating the evolution of Bermuda
As well as growing as a result of consolidation, Bermuda’s reinsurers are rapidly moving away from their traditional focus on property-catastrophe business to become true multiline players, with some looking to develop deep expertise in relatively new lines of business such as flood and mortgage reinsurance.
But they want their Bermuda-based reinsurance brokers to develop with them, believes Tony Fox, chairman of Aon Benfield Bermuda since May 2016, when he took the reins from Paul Markey after leaving his position as Guy Carpenter’s Bermuda CEO.
Fox says the role appealed to him at the time precisely because he could see that the role of reinsurers on the Island was evolving and cedants were willing to work with them on new lines of business. Aon Benfield was eager to adapt to this change by growing its own base of expertise, he says.
“Aon Benfield wanted to invest in the Bermuda platform and that was a challenge I was drawn to,” Fox says. “Prior to that point, the firm had a narrower focus in Bermuda, and as growth opportunities in the property cat space were limited we knew that growth would have to be achieved through broadening our scope and innovation.
“There is a lot of excess capital out there and it is starting to target new lines such as flood, crop and mortgage reinsurance. We are adapting to facilitate that, and we spend time educating reinsurers in potential new opportunities and discussing new products.
“I am pleased with what we have achieved so far. We are the only broker with a full excess casualty expertise on the Island and our industry loss warranties (ILWs) group is based here. We have a team working on inwards multiline business, a property retro team, and we are always keen to explore new areas to help our clients achieve growth.”
Fox says that Aon Benfield continues to invest in its Bermuda platform, and in the functions which support and complement it, such as Aon Benfield Analytics and Aon Securities.
Aon’s vision also says much about its belief in Bermuda as a market. Fox has worked on the Island for almost 16 years, arriving in the aftermath of September 11, 2001, when John Collins formed a platform which was subsequently acquired by Guy Carpenter.
Despite an increase in the intensity of competition between domiciles globally in recent years, Fox believes that Bermuda not only retains its market-leading position as a reinsurance domicile but it is still going from strength to strength. This is justification alone for the broker’s commitment to the Island.
“For us, Bermuda is one of the leading platforms in the world. There are several things we excel in—the worldwide cat space for one; ILS is another. But key now is to become experts in the lines where other reinsurers are growing. That means speciality lines and multiline and retro business. That is a key area of focus for me,” he says.
He explains that a combination of the elongated soft market, pressure on investment returns and excess capital entering the market has triggered a spate of consolidation that has changed the face of Bermuda’s reinsurance landscape. But while that has meant fewer players, it has also meant stronger players better equipped to become true multiline reinsurers and take on relatively new risks such as flood, crop and mortgage.
“Five years ago there were still quite a few specialist property-cat players on Bermuda, but that has changed rapidly. Even some of the long-term specialists have adjusted their books, because there is no growth in that line of business,” Fox says.
He acknowledges that capital is far more fluid now in the way investors can get involved in the industry and cedants can secure coverage.
While this can be a double-edged sword for reinsurers, Bermuda has become a world leader in some aspects of this change in particular—in the insurance-linked securities (ILS) space it now has a dominant market share of close to 70 percent of the market.
“For a broker that means we have to be flexible as well,” Fox says. “We have to be able to discuss all options with clients and help them expand the way they view and evolve with risk. We need to help clients understand the entire spectrum of risk transfer opportunities and offer services in a very different way.”
Sources of growth
Aon Benfield has been at the cutting edge of the evolution of mortgage reinsurance working directly with Fannie Mae and Freddie Mac, the US government-backed financial institutions that provide liquidity to the US mortgage markets by buying mortgages from lenders, and reinsurers willing to understand and take on the risk.
The US mortgage sector comprises a large, diversified portfolio of homogeneous risks that fit very neatly into the risk management frameworks that reinsurers have in place. As a result, in around three years the number of participating re/insurers has increased from three to around 35, with the placement of more than $10 billion of limit, set to generate around $2 billion of lifetime expected premium at expected loss ratios of 10 percent to 20 percent. Aon is building toward a run-rate of around $1 billion to $2 billion of annualised ceded premium, Fox says.
So far, a combination of Fannie Mae and Freddie Mac has transferred as much as $50 billion of risk into the private sector including the capital markets. Fannie Mae alone has acquired more than $3 billion of insurance coverage on over $124 billion of loans through the Credit Insurance Risk Transfer (CIRT) programme.
For the approximately 35 re/insurers that write this business at present, it represents a much-needed source of growth and diversification, and Aon Benfield has been keen to help them understand this market and gain access to it.
“More reinsurers are now gearing up to do this. We can educate them on measuring the risk and the pros and cons and help them get comfortable,” Fox says.
On the back of such a philosophy, Fox plans to spend the next phase of his role growing the team and its capabilities even more. Aon Benfield is already the largest reinsurance broker on the Island, he claims, and he is keen to collaborate more with other Aon offices around the world to bring its specialist knowledge to bear wherever it is needed.
“We are helping develop the market but what we have is a symbiotic relationship,” he says. “While the majority of our business comes from the US for very natural reasons, we also work with many other parts of the world.”
The future is not completely rosy for Bermuda—Fox admits there are challenges. He says potential changes to US tax law could make the economics of using Bermuda more difficult “although not insurmountable”. But he stresses that changes in other parts of the world may benefit the region.
“Solvency II is a badge of honour that will help Bermuda in the long term. We are not seeing much change on the ground at the moment, but it could encourage formations here, especially in light of Brexit. I also expect further consolidation, which would again only strengthen the companies we have here.”