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Bermuda summit emphasises value of risk transfer

Bermuda Marina

The generally chipper tone of Bermuda’s first official reinsurance gathering since Covid was a lesson in how reinsurance markets move when times are challenging.

The backdrop of a global pandemic, an unpredictable war blazing on European soil, climate change impacts on natural catastrophes and rocketing real inflation seemed not to faze markets very much.

If anything, it was the other way around. The value of risk transfer comes to the fore when the going is rough.

The mood was captured in microcosm by one ILS manager who remarked mildly that the few small weather events of Q1 were asserting “a good amount of pressure,” on pricing for the 1 April renewal.

But while the somewhat harder market conditions do produce pockets of positive sentiment, benefits are felt unevenly.

Investors’ appetite for cat bonds and some sidecars is being buoyed by the better pricing. A “return to sidecars,” was hailed by one particularly enthusiastic commenter, despite the challenging retraction of capacity within this niche in the past couple of years, resulting in lower ceding commissions of around 5%-6% on average at the 1 January renewal.

However, bilateral deals like Swedish pension fund Alecta’s direct allocation of $250mn to Swiss Re’s 1863 fund, and $200mn to Scor, suggest new sidecar support is out there.

Other managers have encountered more of a wait-and-see attitude from investors who are holding out for hard evidence of returns in 2022 before allocating.

Capital providers are questioning whether risk-adjusted increases achieved at 1 January have gone far enough to allow for an actual return this year.

The five-year run of losses from 2017-2021 was not able to be sweet-talked away.

Ongoing trapped capital isn’t doing funds any favours either, although one source did say that releases in March, six months on from Hurricane Ida had helped.

The upcoming Florida renewal was anticipated to be “challenging,” or “interesting” per the Chinese proverb.

Unless there is tort reform, more carriers are expected to go to the wall. Some see this outcome as an opportunity.

As with the 1 January renewal, retro capacity is what’s missing, with the knock-on effect that reinsurers’ lines on working layers may be restricted. While recent entrants are in the frame to provide new capacity – Vantage, Inigo, Conduit and Convex are all mentioned in this context – still retrenchments are expected overall.

Russia's attack on Ukraine seemed more distant from Hamilton than it does in London, unsurprisingly given that Lloyd’s is expected to shoulder most of the political violence and aviation claims from the conflict. Lloyd’s has put the cost of the war to its marketplace in the “low-single-digit billions” of pounds.

However, the heightened level of uncertainty around potential losses and other market impacts from the conflict was present in the panel debates and off-stage conversations at the Bermuda event.

Large, multi-national clients with political risk and political violence reinsurance programs to renew on 1 April were said to be encountering gaps in coverage, leaving insureds “holding the bag”.

The war’s impact on energy prices and the general sense of economic instability that conflict engenders was considered an extra, “not helpful,” dimension in the context of mid-year fundraising.

Meanwhile, fresh new energy driving the markets was more evident among the InsurTech contingent, as well as in the enlivened sense of purpose at some MGAs.

Partly this reflects the higher multiples that MGAs are now attracting compared to balance sheet businesses. This development was pointed out several times by different sources.

Reinsurance and ILS underwriters of cyber risk, for example, are looking to nimble MGAs as innovators to support the markets to develop and grow. As in other lines, short-tail exposures, and simpler structures like ILWs and parametric solutions, are thought likely to be helpful in encouraging capital to back the risks.

The call for innovators to help improve market efficiency focused especially on new ways to measure losses, in property and cyber.

With investor reticence in mind, finding more efficient and accurate ways to quantify risk and trigger payouts is seen as vital.

Bermuda has an eye to establishing itself as InsurTech hub, and the Bermuda Risk Summit had attracted a good peppering of early-stage providers and start-ups. The event, expected to happen again next year, could well become the place to check in on how far and how effectively the new technologies are being taken up.

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