Non-traditional reinsurance capacity puts pressure on traditional Bermuda

The analyst and research firm Keefe, Bruyette & Woods Inc. have published another of their reports looking at the Bermuda reinsurance market. These regular reports are put together based on the feedback KBW receive while interviewing key players in the Bermuda reinsurance market. They provide an insight into the issues which are troubling reinsurers domiciled on the island. Interestingly, this year non-traditional capacity flowing into the reinsurance market is cited as a pressure on the sector.

The KBW report, titled Bermuda: A Glass Three-Quarters Full, says that the influx of new capacity to the islands reinsurance market is largely down to non-traditional sources which include capital market investors and hedge funds. The report explains that this non-traditional reinsurance capacity, which comes from activities such as catastrophe bonds, sidecars and collateralized reinsurance vehicles, has now become a meaningful part of the reinsurance market and as such has an influence on pricing.

The inflow of capital into the Bermuda reinsurance market from non-traditional sources has had a noticeable impact on pricing and rate rises, according to the report. They cite the recent 1st June renewals in Florida as an example where they say all the reinsurers they interviewed were disappointed with the rate rises and pricing that was achieved, reports suggest that rate rises were generally under 5%.

KBW stress that Bermuda is well positioned to take advantage of the catastrophe reinsurance market rate rises around the globe and despite being affected by financial market conditions which lower their investment returns they expect Bermuda to remain well positioned to achieve attractive returns.

Interestingly Bermuda is one reinsurance market which has always been a leader in non-traditional reinsurance capacity generation so it’s enlightening to appreciate that the non-traditional capital inflow could be seen as competition by some of Bermuda’s more traditional players. The non-traditional markets capacity is now thought to be as much as 10% of the overall Bermuda reinsurance market, according to Business Insurance’s coverage, and with investors attracted to the liquidity and direct access to business the non-traditional side of the market is expected to grow.