Traditional values help specialty lines growth

Specialty lines represent an important and growing part of MS Reinsurance’s business—and they reflect the company’s traditional approach and values, says the firm’s Andrew Phelan.

Underwriting many types of specialty lines requires more art than science, expertise and knowledge, which is perhaps why it suits the ethos and values of MS Reinsurance: forming long-term relationships with partners and adding value. That is the view of Andrew Phelan, head of specialty lines (Bermuda) and global product lead at MS Reinsurance.

“You need experience and judgement, and maybe a little bit of instinct,” he told Bermuda:Re+ILS. “If there is an information gap, which there can be in some lines, you have to take a jump using that knowledge. It also boils down to investing in deep relationships with clients—they appreciate that we will be there tomorrow but also in 10 years’ time.”

On this basis, Phelan is bullish about the opportunities in this part of the business. He describes the specialty reinsurance market as a pretty robust place at the moment. 

“There is adequate capacity, but it remains a firm market. The hardening we experienced in the last year or two was relatively moderate compared to other classes in the wider reinsurance world. 

“It’s been a turbulent five or six years with challenges we’ve not seen before, and some that were expected, but our clients have continued to perform well and that’s managed to keep the market relatively stable,” he said.

MS Reinsurance’s specialty lines are some 10 subclasses of business the reinsurer underwrites. These predominantly cover what it describes as financial risks, and include agriculture (the largest specialty line written in Bermuda), engineering, credit, bond, political risks, and mortgage reinsurance.

That said, these risks are more exposed to macroeconomic conditions. Phelan admits that it has been a turbulent five or six years with challenges the sector has not seen before, although some were expected. 

“The turbulence started in the 2008/09 economic crisis. The fallout from this was followed by heightened insolvencies, then COVID-19 and now war and political instability around the world,” he said.

Yet through all these challenges, there has been no major dislocation in the market. 

“The market has managed to weather its way through the storms.” Andrew Phelan, MS Reinsurance

“Our clients have continued to perform well. Despite the difficulties experienced, the market remained very strong, the reinsurance market remained committed. The market has managed to weather its way through the storms. 

“Over the last 18 months there has been an increase in insolvency and defaults, but these are not translating directly into an increase in losses and claims within the reinsurance market.

“On the back of all that, we’ve seen some correction in rates, but nothing too significant. It is fair to say it’s been a challenging five years for many different reasons, but it’s a testament to the quality of our clients that they can pre-empt to a degree and manage their risk through all sorts of scenarios that are being thrown at us,” he said.

The right partners

For MS Reinsurance, risk selection becomes important. Phelan acknowledges that many of these lines of business are small in the context of the wider reinsurance markets. 

“Working with the right partners is absolutely key. Our book is made up predominantly of what I would consider to be partners for the long term. It’s our responsibility to become a trusted reinsurance partner, delivering our products as smoothly, efficiently and with as much confidence as we can. 

“They know that when we’re facing the numerous challenges, we’ll be there. But client selection is absolutely key for us,” he explained. 

One of MS Reinsurance’s biggest lines of business is political risk, which represents around a quarter of its book. He admits it is a line of business always influenced by controversy and conflicts, but it has performed well last five years. 

“Again, it’s about risk selection—for our clients to make those careful risk selections, and for us to choose our clients wisely.

“There are headwinds to the performance of the book, but it’s been that way for a number of years and the losses have been minimal. We see the activity, but not to the point that it challenges the profitability of any of our clients at present.”

“We are an old-fashioned reinsurer, with a parent that takes a very long-term traditional view.”

An important line is trade credit, which Phelan describes as having an unprecedented good run in the last three to four years to the point where the loss ratios are very low. The sector is seeing a return to more normal level of losses now, but he describes trade credit insurers as “very sophisticated in managing their risk”. 

“We’re seeing insolvencies climb, but these are not translating perfectly into losses. We would hope that many of the insolvencies won’t be necessarily insured trade credit losses.”

Another important pillar is mortgage reinsurance which he describes as “in transition”. On one hand, it has been most directly impacted by high interest rates meaning a significant reduction in the volume of business coming to the market. There are fewer sales and a very sharp drop in refinancing.

Yet higher interest rates have not translated into more defaults and losses. He says this is because the jobs market remains strong and house prices are robust. “The performance is still good, just the volume of mortgage business is down,” he said.

With this in mind, Phelan is bullish on the opportunities in the market. MS Reinsurance is expecting growth to come from the credit side and in political risk—as well as through natural, organic growth. 

“Our clients have enjoyed a good year or two of partly inflation-driven, partly demand-driven growth in their portfolios. We’ve benefited from that and it will continue,” he said. 

“We’re not aggressively seeking growth by any means, but we will review opportunities and if they fit our strategies and our model, we’ll move accordingly. I suspect there will be some growth.

“However, we are an old-fashioned reinsurer, with a parent that takes a very long-term traditional view. The opportunity for us is saying: ‘We’re here, we’ll be here tomorrow and next year. And in 10 years’ time, we still want to be a partner to you’.

“We like to get to know a client’s business right down to the detail, but we’ll be with them through the thick and thin. That’s the opportunity—because it’s more unusual than you’d think—to be an old-fashioned reinsurer in this market. 

“Our opportunity is to play to that. We are, for many markets, a preferred reinsurance partner. People come to us and this is our chance to prove that over the next few years,” he concluded. 

Bermuda: the centre of specialty? 

Phelan says MS Reinsurance is agnostic about where it writes business: it has hubs in New York, Miami and Zurich as well as Bermuda. But he believes that Bermuda brings some advantages—and is becoming more of a global specialty hub in the same way that it has been for things like property-cat business over the years.

“We’re Bermuda-centred because this is where our people are,” he said. “We have resources in the Zurich and Miami offices, but the core of it is here in Bermuda. 

“Bermuda is a great choice for any reinsurance business. The concentration of capital and expertise in such a small space is unique, and we all benefit from that. We also have a very efficient, respected and user-friendly regulator, which makes operating a reinsurance business here more straightforward and predictable. 

“Bermuda is a very important strategic hub for us as a company and for our business in the financial risk space.”

Phelan believes Bermuda is becoming more associated with specialty business. “If we look at 10 years ago versus now, Bermuda has significantly increased importance in the specialty arena, particularly in financial risks. The volumes in property-cat have been coming down to a degree in the last year, while at the same time specialty has been growing at quite a pace. 

“For specialty, it’s well worth a visit by a reinsurance broker. There is enough of a market here to make that worthwhile,” he said.

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