Reinsurance: back where it needs to be

Reinsurers have moved from protecting cedants’ earnings to protecting their balance sheets, say five senior executives in a roundtable sponsored and hosted by AXA XL Re.

AXA XL Re Bermuda chief executive officer Mark Twite, Hiscox Re & ILS chief financial officer Elizabeth Breeze, Association of Bermuda Insurers and Reinsurers John Huff, Walkers insurance partner Sarah Demerling and ReFlex Solutions Neville Ching came together with moderator Bill Zuill, Bermuda:Re+ILS editor, to assess the state of the insurance market in June.  

How did the January 1, 2024 renewals go, and what are the prospects for the rest of the year?

Mark Twite: When we sat here a year ago, it was a very different dynamic. 2023, particularly the January 1 renewal, was a difficult market to be in. It was difficult for the brokers and for the cedants.

It was difficult from the reinsurer’s perspective, because of the uncertainty on retro placements. It was not clear how this would play out.

For 2024, the word I would use is “unsurprising”. That’s not a negative word nor a positive one. We had an indication of what 2024 was going to look like from the renewals in June and July of 2023. We saw that the market was being very disciplined. There was capacity available at the right price.

T hat enabled some reinsurers to participate where previously they probably would not have. I saw an understanding of where the reinsurers were and the cedants knew where we were going to be. more than their earnings base.

That enabled some reinsurers to participate where previously they probably would not have. I saw an understanding of where the reinsurers were and the cedants knew where we were going to be.

People are now coming into the market with some significantly increased lines and everyone wants to grow. People are buying more limit, but when you do the maths, there isn’t an ability for everyone to grow by the amounts they would like to. So it’s been a bit more competitive.

We have seen downward pressure on rates in some classes. I’d say casualty is probably the one isolated element that hasn’t seen that.

I am not concerned about terms and conditions or retentions, which have held. There continues to be a lack of desire for aggregate covers from reinsurance players. The risk mitigation in the environment we are participating in is certainly conducive to partnership.

Elizabeth Breeze: On overall rates, we did see extra competition coming in, and it was clear that lots of people were looking to grow. 

We were also looking to maintain and grow where appropriate. We saw rates anywhere between 0 and I would say a little bit further down than 5, we tend to focus on better quality clients, and some of those have not been loss-affected and are going down to minus 7. It depends on the client.

As you said, Mark, it’s a good thing. The rates that have been benefiting the reinsurance  programmes over the last few years mean that we’re still pricing our risk appropriately. We’re heading into one of the potentially most active hurricane forecast seasons that anyone has spoken about, so we need that and it’s appropriate, but we still feel confident that the business is appropriately priced.

If there’s a drop-off in rates, does that not suggest that rates are no longer at a sustainable level?

Breeze: The competition has returned to a healthier position—2024 is more orderly, more sensible and more amicable. In 2024 the underlying insurance companies have started to get rate coming through their books; it takes time for them to file rate increases and get that coming through. They now have the budgets to afford the reinsurance programmes they need, so they’re looking to spend a bit more and it was more structured.

Neville Ching: That’s a very important point. The catch-up from the primary market is to be able to fund, which was the concern a year ago. Obviously, as a broker, we act on behalf of the client at all times. 

But we want to go into a market, as you would go into a store, and have the shelves full. You want to recommend the purchase of the product that fits.

It became increasingly easier in January but it was still a bit nervy.

In the second quarter, the capacity has started to gear up, particularly filling in some of the retention, still at a disciplined level, so we’re not down to the levels of 2017 or 2018.

Twite: Particularly in the US the limits purchased are showing growth. In 2023 price was the issue for any board discussion. That has gone away, but what hasn’t is a continued desire to protect. Generally, we’ve seen that those retentions have been stable. If they have come down, that’s been supplemented by more limit on the top. So the protection that has been purchased is bigger in 2024 than it was in 2023, and that may continue.

In the last month, you have had all the warnings about how terrible the hurricane season is going to be. Everyone is buying some extra protection at the top, so price is not being pushed to the side, because adequacy is important from everyone’s perspective, but price is less the determining factor than the desire to have the capacity to protect.

John Huff: In our global economy, the number one trend is raised awareness of risk. The beauty of all this information-sharing is that everyone is aware of the forecast for increased hurricanes, and the social inflation risk, US litigation risk, higher inflationary risk, rising property values and more.

This growing knowledge is creating global demand like we’ve never seen. There will be some variability on attachment points or retentions, but overall, the reinsurance market has shifted from protecting earnings of ceding companies to protecting balance sheets. It’s returned to where we need to be in the reinsurance space.

Ching: Some of the buying portrayed in the media may have been labelled as panic purchases, but talking to risk managers now, it was reinsurance buyers who bought what they felt they should on January 1 and up to June 1 and July 1. People may blame it on hurricane forecasts or other political influences around the world, but it’s not necessarily so.

It makes the industry look unstable but I think it is very stable.

Because of the margins off the back of only one year, there’s seemingly enough fuel in the system and people are remaining disciplined.

Huff: As we sit here in early June, we’ve just had big news of AM Best moving the market outlook from stable to positive. That is a big step for the Bermuda market. The term AM Best used was “generational hardening” of the global P&C market. In some ways, that’s a lagging indicator of what happened in 2023 and now 2024. But it’s perfect timing as folks get ready for the 2025 renewal. 

Sarah Demerling: One of the things in that report was that tighter terms and conditions was one of the benefits and you’re seeing more specific perils being more closely defined. Some of that is driven by third party capital coming in and wanting transparency in the contract.

Huff: At this discussion last year, I said “lawyers are the new underwriters”. This year it’s been proved, with how terms and conditions are being stuck to, and with continued underwriting  discipline.

How much difference is third party capital making? Is it driving price changes?

Breeze: My sense is they are backing established players who know what they’re doing, who are comfortable deploying when the time is right. And they’re tracking alongside them. Where it’s different is the catastrophe bond sector where you’re seeing very significant growth in the appetite for those products from alternative capital.

Demerling: Going back to the AM Best change, this is one of the things the industry has known for a long time, but now AM Best is seeing insurance-linked securities (ILS) as a “strategic partner” to rated balance sheets and realising that everyone can coexist. That recognition is an important sign of where we are.

Huff: It’s a recognition of what our market has known for a long time.

What are the other drivers around supply and capacity? Have the changes in litigation in Florida made much difference?

Huff: We just came off Florida renewals and it was very orderly. People knew what to expect. There is growing optimism after the tort reforms went through in Florida, although you’re not seeing 100 percent of the impact from those reforms yet. But there’s a general recognition that there will be changes in Florida, and the market reflected it. 

Overall, you’re seeing new capital in the market and optimism about a slowing down of litigation abuse. The numbers were compelling. Florida had 9 percent of the property claims in the US and yet had 79 percent of the property claims litigation in the US. There had to be a change—hats off to the political leadership in Florida that was able to get that change through a very contentious legislative process.

Ching: It’s proof that the changes have had a material effect.

How far behind is California?

Huff: We have hosted the California Insurance Commissioner on-Island twice in the last year. We’ve never had that before. Commissioner Lara is very focused on making sure that the California market is modernised in the sense that it recognises the impact of climate risk in the market and recognises cat modelling and reinsurance cost in the making of rates in the state.

It’s always been an issue in California and his hands were somewhat tied politically with some of the referendums they have in California but they’re making great progress within the department.

California is geographically such a large state that there are significant natural catastrophe risks there. It is the largest purchaser of earthquake reinsurance in the world and now probably the geographic region that’s most impacted by wildfires; it also gets hurricanes. There’s a real commitment to make some dramatic market changes in California and the commissioner is to be applauded. The governor has stepped in to help make those changes as well.

Ching: We have a client who has come up with some revolutionary new ideas on wildfire using digital capability. He has been very complimentary about what they’re now being allowed to do, the bills that have been passed and the grease that has been put into the system. Here’s a player in the marketplace looking to provide solutions to a desperate insurance buying population and he’s providing what’s needed. Along with changing the regulations, the reforms are still probably behind Florida, but it is encouraging.

Twite: We support a lot of cedants who simply had to come out of California, or at least put a moratorium on it. But a number have now started to write new business in California, and that enables more capacity for the reinsurer to participate in.

Huff: Coming from Missouri, I have to give a plug for the Midwestern states. We’ve had significant tornado activity this year, substantial storms in Oklahoma, Missouri and Iowa, and we’re seeing the importance of the entire sector stepping up. You see smaller ceding companies that rely on international reinsurance to be able to sidestep their geographical correlation of risk.

If you have a small mutual company in the Midwest that covers property-cat in a small geographical area, you have to rely on the diversification of your reinsurance portfolio.

California is still building in wildfire-exposed areas and Florida is still building on the beach. Until those things change, is fixing tort reform in Florida, or making the California regulatory process better or making some changes in the Midwest just putting a Band-Aid over a bigger problem?

Huff: This week a state that you wouldn’t have thought would be friendly to building codes is doing a study on the relationship between building codes and the accessibility of insurance coverage in the state. We’re seeing a growing awareness of risk. In a state that may not embrace more regulation, more building codes and more compliance, you’re seeing the connection of the dots between what those fundamental programmes might need and getting insurance coverage in your state. 

Reinsurers today can decide where to deploy their capital and if they have a choice to deploy it to places that may be more resilient and have stronger codes, the modelling will reflect those differences.

Demerling: As much as everybody might dislike regulation, it serves a purpose. You have to have that framework, and there is a correlation. Sometimes it’s good, if it’s not overly onerous.

How much of a role does climate change play in this?

Huff: When ABIR started 30 years ago, after Hurricane Andrew, we didn’t know that building a natural catastrophe property business was really building climate risk finance. The foundation of our market is based on climate risk, so there’s a tremendous focus on the liability side of making sure these risks are underwritten.

We see the growing importance of making sure we’re supporting industries that are in transition and not abandoning them as they transition to net zero.

But you’re also seeing an awakening on the asset side of the balance sheet. There was an announcement by the Insurance Development Forum working with BlackRock on building a resilient infrastructure fund, and using the asset side of our balance sheet to support those types of funds will be very important for the industry going forward in a very conservative way.

We have to be ready for a category 5 hurricane at any moment now that we are past June 1, so reinsurers still have to hold very liquid assets, but we can show the strength of our industry on working on climate on both sides of the balance sheet.

Ching: There is a long way to go, but there is that awareness. There’s also the fact that it’s baked into the margins now. Climate change is factored into the models and into proprietary analysis, so we’re getting there.

Breeze: We’re in a good place where we’re realistically building climate change into our models. But looking ahead, I’m sorry to say that in the next 20 years, the volatility is going to become greater and the need for protection will therefore grow. We have to continue to build out our understanding of these dynamics and work out ways to meet customers’ needs. So it’s not as though we can say: “we’re done”.

Huff: Our biggest risk is masking the cost of risk, so you can’t allow policymakers to use subsidies or some other way to mask what the true costs are. You have to be able to say: “if you want to build a home on the coast, this is what it will cost”. We have all the data that can justify that cost. That should be the barometer for policymakers to make changes.

How can an industry in Bermuda influence policymakers around the world to face reality and not go for the short-term solution?

Huff: The most effective way is to work with your local partners on the ground. We always do better in partnerships. We think Bermuda is the most important place in the world, but we usually do better when we partner with people at the most local levels.

Twite: To John’s point about partnerships, you get into the level below that and say: “there’s recognition of a phenomenon related to climate, how can we mitigate that? How can we work together? How can the end clients do something to protect themselves and also reduce the exponential growth in climate change? How can individuals do something to create a better environment?”.

That may be at a board level discussion, at a meeting with a client or with your family at the dinner table. We need to be aware that it is not solely the purpose of a regulator or an insurance or reinsurance company to fight against it. It is the purpose of everyone here.

Demerling: That’s important. The value chain has to go all the way, and whether you start at the bottom or the top, it starts with communicating. Starting with investors and looking at the other side with policyholders, everybody has a need. It’s trying to get everybody to recognise the overriding need and how we can find products that match that.

It’s working together and understanding and communicating, which sounds very grand, but it does take everybody in that chain to make a difference.

Huff: It used to be the case that people talked only about reducing net carbon emissions, and then you had people talking about adaptation and buying more insurance coverage, and then you had people talking about mitigation. Now people are talking about all three, because it is a complex issue.

Twite: Five years ago, we would never have a client discussion and ask: “what is your ESG policy and what are you doing to limit exposure to X, Y and Z? What are you doing from a board strategy perspective?”.

Now when we speak to our clients about providing reinsurance to them, that is right at the top of the list—we will look at how they are ranked regarding their environmental and social perspectives.

Breeze: It starts at the top and the bottom. It starts with your investors: “what are you doing as a board to look after ESG?”. Your board was then probably grilling the CEO and you can see how it permeates through organisations and the economy and how we operate and interact with each other.

Then there is the reverse. Children in school are being taught about climate change and what it means to them and looking at their parents and saying: “what are you doing with my future?”.

Demerling: This is a plug for Bermuda. We’re in a great place to have those conversations and make a difference and build it in. Whether it’s the Bermuda Monetary Authority (BMA) encouraging surveys and gathering data, or making sure that we have projects that we can say, in the same way that you have Solvency II equivalence, that this is equivalent to the EU ESG reporting requirements, this has all the top markers we need to make sure that it can be exported around the world.

Huff: I always say we were into climate before it was cool. I think it’s the number one issue of driving young people to our market. We have had challenges in explaining career opportunities in our market, where we’ve always been second to investment banking. Now new industry entrants realise the value proposition of insurance and reinsurance. It’s an easier story to tell.

The young people want to talk about climate, artificial intelligence, and diversity. We have 108 interns with our member companies this summer, and they’re looking for opportunities in those three areas.

Recruiting and retention are a challenge for the industry. Where are the Bermuda companies in the mix?

Twite: There are elements in this industry that entice individuals who want to be involved in these different areas. When we look to recruit here, I would say it is becoming easier as the industry is something that people are now encouraged to participate in. There is more of a demand to be part of the re/insurance industry than in the past.

Bermuda will continue to have its issues in the sense that there is a smaller population here. Sometimes people have to go abroad to get particular skillsets, but even that is improving. There’s an energy that I didn’t see 35 years ago when I joined the industry. So we’re in a much better place to get better people involved from the outset than we were 20 years ago.

Ching: The media have been doing a good job with those who come to the companies or organisations and offer themselves up, but there’s still an underserved group of young people who are in education in secondary schools or colleges. We need to get to them, too.

Huff: We have just finished our fourth year of offering an introduction to insurance course at Bermuda College. This year, 700 people registered. Many of them are career-shifters who when they take on a couple of the courses, realise they are interested in this industry. They figure out what we do in those tall buildings down in Hamilton. But we still have much work to do.

Breeze: There are quite deliberate policies of trying to remove some experience-led bias when bringing people in. We’ve taken time to teach people how to do an interview, how to go through the process, giving them more insight into what they should expect when they walk through the door.

We’re giving people from less-privileged backgrounds the opportunity to come into a career. I’m sure we can do more, but it’s very much on people’s radar.

What I’ve noticed recently as the CFO is that the underwriting side is always very attractive—everyone wants to be an underwriter and fewer people want to pursue a finance career. Actuaries are still in high demand, but not everybody can be an underwriter.

There’s a whole breadth within our sector which is fantastic, but how do we make all the careers  look fascinating? I am interested in doing that.

How important is it to make sure that the workforce is diverse in terms of gender and other factors?

Twite: It’s fundamental because no single person knows everything. You need to have many different opinions so you can collectively come up with the right answer, because people individually do not have the right answer. For me, it’s as simple as that.

I want my workforce, and the people and partners I work with, to be as diverse as possible because I want to learn and keep encouraging the learning process. And I want to be able to say, every day, that I’ve learned something new and it’s enabled me to become a better person.

You can’t do that sitting by yourself in a room or sitting in a boardroom with people who think exactly the same as you.

Ching: It’s similar to climate change in that although we’ve come a long way, there is still a long way to go. In my time I’ve seen dramatic change, particularly in the last five years. I’ve seen people who used to be very stubborn and blinkered change, which is very encouraging.

Demerling: Bermuda:Re+ILS is running a Women in Hamilton feature and we were asked what did we see coming through, and whether it was a man’s world. The next question was “would you encourage younger women to go into the industry?”.

Definitely—and that’s positive, because it shows that there has been change. I completely get that it’s not just men and women, it’s all forms of diversity. You need different perspectives and from a profitability perspective, research has shown that it makes a difference to the bottom line.

The more diversity you see in the boardroom and the C-suite, the more you’re going to encourage even more of that.

Breeze: As a young Liz Breeze I did not understand the whole woman versus man thing. I did not see any barriers and I’ve progressed through my career. But what I would say is that in many  forums, typically, I’m one of two women sitting in a room of around 40 to 50 men, and probably there’s no person of colour. So it’s not good enough.

However, there’s a better representation of women in senior leadership roles. We’re lucky at Hiscox—Kathleen Reardon is our chief executive officer and I am the CFO. We have a femalegroup chief underwriting officer, and Kate Markham is the CEO of our London market. It is a fantastic representation of women in senior roles.

Everyone has great intent but I’m hungry for it to be faster because if we think how quickly our world is changing, I don’t know that we’re changing as fast as the world is.

Huff: We need to celebrate the wins. We’re seeing advances. Pina Albo from Hamilton, our chair, is the first female global CEO we’ve had as ABIR’s chair over the past 30 years. We’ve always had a global CEO as the chair, and now women are progressing into those roles. We have several female CEOs and CFOs in Bermuda, so sometimes we’re harder on Bermuda than we should be.

Also we’ve started talking about diversity when we participate in some of the global associations. When you start talking about diversity, they think you’re talking only about gender—they’ve never had a discussion on race, yet part of that depends on which region of the world you come from. So we have a lot of education to do ourselves.

One upcoming regulatory change is that Solvency II will have some enhancements, and a diversity component on gender. We’re starting to institutionalise awareness. If you focus on something in all different aspects, you will see change.

Where is Bermuda with the Corporate Income Tax?

Huff: We had a heavy lift in 2023, getting the Corporate Income Tax Act passed by Parliament. It was the perfect example of the ‘Bermuda Triangle’—industry, the regulator and government—working together. 

People from all over the world contacted me saying: “you guys will never get this Act passed”.

We didn’t start until August; we had three robust public consultations and then reached agreement and consensus to get a major piece of transformational legislation passed. It was very important to get it passed in 2023 so people could start the process before the tax is effective in 2025.

The investment analysts have said Bermuda can do this. Bermuda government is working with industry. And, if 15 is the new zero (the percentage of corporate income tax), so to speak, then nobody’s going to be able to do it better than Bermuda.

There’s still much work to do. The tax agency has to be established, some fiscal responsibility measures have to be taken into account and we’ll have to have a more sophisticated financial regime in terms of budgeting within the Bermuda government.

We’re waiting on the Tax Reform Commission report that will be given to government later this summer, and we’ll see the results by year-end.

You’re not seeing a rush to the door?

Huff: No, because Bermuda’s approach is that this is a global minimum tax. If you’re a company of size, you will be impacted by this tax globally. The biggest complicating factor is probably that some significant jurisdictions are not implementing the Corporate Income Tax, the US being the largest, so you have to work within the very complicated US tax regime and determine what that might mean for Bermuda.

Demerling: If they’re in scope as a multinational within the threshold, they’re going to be paying it anyway. It’s just that they’re paying it here. If they’re doing business here, and there are offsets, there is a de minimis benefit for that. On the international stage it is an enhancement to be able to say we’re now a low-tax regime that meets international standards.

We’re still agile enough that it happened very quickly. It doesn’t become effective until January 2025. We did a lot in the last quarter and where we’re seeing people potentially open to unintended consequences, we are looking to fix that.

Huff: There’s still much work to do, but a big subject will be qualified refundable tax credits, and how that translates into competition in the market. Our competitor jurisdictions will be very good at those, and we need to make sure that Bermuda is equally good at them.

Ching: That awareness—from if not day one but day two—is key to Bermuda foreseeing some of those issues on the horizon, isn’t it?

Twite: To Sarah’s point that if Bermuda didn’t do this, we were going to pay, but we were going to pay someone else—that’s right. My view is that benefits can be gained, both from an industry and a personal perspective. We have to get those offsets right—we’re very good at being agile, fast and getting a resolution quickly. I’m sure we will get to an end product that is positive for industry, but also for the person on the street.

Demerling: The rhetoric is so important, because the competition is delivering messages which aren’t correct. They are scaremongering that “you don’t want to go there”, so we need to get the message out that it is positive. We need to be in charge of that message.

Huff: There may be a whole variety of reasons that Bermuda is not the location for all businesses. But just because Bermuda may not be right for them doesn’t mean they should point to Corporate Income Tax, because people will blame the Corporate Income Tax for other decisions that are having to be made.

It’s a net positive. Our members will get credit for the taxes they’ve been paying for decades. When people say: “they don’t pay any tax in Bermuda”, I say: “the government has a $1.2 billion budget, who do you think is paying for it?”. The companies have paid it all along, and now they’re going to get the credit for it.

As the largest single taxpayer on the Island, the reinsurance industry will presumably have an interest in how that money is being used. Is there progress on that?

Huff: The Tax Reform Commission, which will do the initial recommendations, is listening very seriously to stakeholders on the Island. Their report will come out later this year and will be very

important. It’s intentionally a very diverse group, set by statute: seven individuals with representation from international business, local business and political parties and labour as well. They will make recommendations to the government and then government has to decide.

Bermuda is an expensive place. Is this an opportunity for the Island to get costs down?

Huff: We need to address the cost of doing business in Bermuda. We can have more jobs here if we have more control over our cost of doing business. It’s that simple.

Ching: The reinsurance industry has a powerful voice in this, doesn’t it?

Huff: We’ve done some initial modelling and ABIR collectively will be the largest payer of the Corporate Income Tax along with some of our individual members, but the markets are quite differentiated. Some very large companies will pay a substantial amount of Corporate Income Tax. As Mark says, there will be an expectation of where those proceeds go. We have a tremendous opportunity here with an uplift of revenue, to address some of our long-term debt issues, not only from the general fund, but also in pension funds, government and social insurance.

What other kinds of regulatory changes are happening?

Demerling: The Insurance (Prudential Standards) Recovery Plan  Rules have been enacted, but they don’t become effective until May 1, 2025. That’s making sure that insurers are looking ahead to adverse situations and putting thoughtful measures in place. That’s a continuing example of the approach we have from the BMA. The consultation to keep us compliant with Solvency II equivalence had a lot of involvement with stakeholders and took a long time. It became effective at the end of March.

We are seeing changes in risk management frameworks and capital charges in the actuarial side of things. It is an enhancement.

Everybody agrees it hits the long-term sector more than reinsurance, but to the extent you’re a commercial re/insurer, there are still impacts and I think those are good.

We’re expecting a consultation paper to come out for segregated accounts. It’s not just a kneejerk reaction to the large case that has been talked about, but the regulator is making sure that it’s getting sufficient data and understanding what is in the market and that the reporting is happening.

That has been circulated already within industry groups, and it’s coming to public consultation, just to make sure the framework is where it needs to be. The BMA is very good at making sure it’s staying abreast of all that.

Huff: The BMA continues to show us its value proposition as being innovative and responsive not only to the industry, but to international standard-setting.

The regulatory enhancements that Sarah talked about that were effective in Q1 were necessary to add some additional guardrails to make us internationally compliant and to address some of the issues that were swirling around.

Resolution and recovery is a hot topic internationally now, but we saw a cycle that started in the US after Dodd-Frank of the necessity for companies to assess what happens if they do get into a stressful environment. We could argue the merits of that type of planning but it’s the trend to have such a regime in place.

The BMA juggles Solvency II equivalence with having reciprocal jurisdiction status in the US and in the UK and it does a tremendous job of making sure we do our own thing, but are recognised internationally, and they really hit the streets. I have a pretty busy travel schedule to keep up with wherever the regulators are, and the BMA is always there.

At the National Association of Insurance Commissioners international flagship forum in Washington DC in May our chair Albo spoke on the CEO panel, and BMA CEO Craig Swan was speaking on the next panel, so the regulator is very active. 

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