Reinsurance helps Bermudian insurers resilience, but ILW use drops

by Artemis on November 29, 2016

During 2015 Bermuda domiciled insurers utilised a range of reinsurance solutions to insulate themselves from catastrophe events, with the level of reinsurance dependent on the peril, according to a new report from the Bermuda Monetary Authority (BMA).

Bermuda - Photo from Americas Cup websiteThe BMA has released its first ever ‘Catastrophe Risk in Bermuda’ report, which analyses the Bermudian re/insurance industry’s resilience to catastrophe risks in 2015, and which is expected to become an annual publication.

To produce the report, the BMA explains that it used aggregated and non-aggregated data from the Bermuda Capital and Solvency Return (CSR) filings of Class 3B and Class 4 insurers, for the period ended December 31st, 2015.

A section of the report explores the use of reinsurance protection among Bermuda insurers, seeking to understand how much companies rely on reinsurance and other loss mitigation tools for different perils and exposures.

The results reveal that the level of reinsurance protection utilised varies depending on the peril, with perils that have the potential to incur the most significant losses, being more heavily reinsured than others.

Percentage of Gross Loss Impact Ceded (In percent)

Percentage of Gross Loss Impact Ceded (In percent)

As evidenced by the above chart, provided by the BMA, perils such as Northeast hurricane, Gulf windstorms, and San Francisco earthquake, are more reinsured than perils such as Australia flood and U.S. tornado.

“While the percentage of the aggregate loss impact ceded seems to imply a significant market wide reliance on reinsurance, on average insurers ceded only 36% of their loss impact,” says the BMA.

Interestingly, the BMA report also notes that during 2015 insurers utilised a varied and diversified set of reinsurance instruments, from both the traditional and alternative reinsurance sector. This includes industry loss warranties (ILW’s), insurance-linked securities (ILS) and other reinsurance agreements, such as quota share contracts.

Looking at the use of reinsurance arrangements utilised by the base of Bermudian insurers over the last five years, the BMA claims that the use of ILW contracts has fallen from 25% in 2012 to 6% in 2015. From 2012 to 2014 the use of property catastrophe contracts gradually declined, however, the BMA notes a sharp increase in 2014 to 2015, growing from 28% to 41%, respectively.

“The use of other reinsurance arrangements has relatively stayed the same over the past five years,” says the BMA, as shown in the below chart.

Reinsurance Strategy trends - Average Occurrence Limit 2011-2015 (In percent)

Reinsurance Strategy trends - Average Occurrence Limit 2011-2015 (In percent)

“In general, the 2015 Cat underwriting loss scenario results showed that not only is the Bermuda insurance market resilient to potential Cat underwriting loss impacts arising from all major perils underwritten, but will still hold satisfactory capital to settle policyholders’ obligations,” explains the BMA.

Interestingly, the decline in ILW usage roughly coincides with the explosion of the collateralised reinsurance market, which likely explains some of the change and also the rise in property catastrophe reinsurance contracts (which is likely where collateralised reinsurance contracts sit).

That would suggest that the capital markets participation in Bermudian insurers reinsurance programs has likely grown if anything, as evidenced by the continued growth of the ILS market capital base to $70 billion plus.

Analysis from the BMA states that insurers, on average, will retain 70% gross (pre-reinsurance) and roughly 84% net (post-reinsurance) of their statutory capital & surplus following the largest catastrophe underwriting loss event, which further supports the benefits of utilising reinsurance to protect against catastrophe events.

Bermudian insurers clearly benefit from the utilisation of a variety of reinsurance and ILS solutions in order to support their businesses and protect them against a range of catastrophe events, both small and large, with the capital markets playing a key role.

You can download the BMA’s full report in PDF format here.

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