Reinsurance & retro cession growth in Bermuda led by quota shares

Increased use of quota shares as a way of ceding catastrophe losses to sources of reinsurance and retrocession led the way in Bermuda in 2017, as re/insurers domiciled in the marketplace ceded more of their losses last year.

Back in 2015 Bermudian re/insurers only ceded roughly 36% of their catastrophe losses, to sources of reinsurance and retro capital.

That percentage jumped in 2016, as Bermudian re/insurers ceded 45% of their losses to reinsurance and retro.

Last year the percentage jumped again, as on average re/insurers in Bermuda ceded 50% of their gross catastrophe losses to outside sources of protection.

The data is according to the latest survey on catastrophe risk in the Bermudian re/insurance market from the Bermuda Monetary Authority (BMA).

Of course there is one good reason the cessions increased again in 2017, the amount of losses faced.

With re/insurers facing a significantly higher loss year, some companies will have seen a much larger percentage of losses ceded, as their losses ate much further into their reinsurance and retro towers.

As re/insurers in many cases ate through the shared portions of their reinsurance coverage, their reinsurers and retrocessionaires will have taken increasing percentages of their losses.

The BMA said, “Overall, looking at the aggregate loss impact, the results showed that the level of reliance on reinsurance has increased compared to last year and varies across each peril.”

Interestingly, one fact that stands out from the BMA’s data is that the quota share instrument saw a significant amount more activity in 2017.

Back in 2015 only around 10% of the cessions made were through quota share arrangements.

But last year this figure leapt to 21%, which we’d imagine is a reflection of the higher industry-wide catastrophe losses and also the resurgence in use of quota shares, many of which are fully collateralized by ILS funds and investors.

Quota shares have increased in size in the market and their use has become more widespread. Part of this has been down to Bermudian re/insurers increased activity in negotiating quota shares with large ILS investors and ILS funds.

It’s also interesting to note that the BMA’s data shows that only 10% of losses were ceded to specific insurance-linked securities (ILS) protection.

It seems likely thought that a chunk of the increased quota share activity was fully collateralised and so this reinsurance was also provided by some ILS interests, although not falling into the ILS instrument bracket.

Industry loss warranty (ILW) cessions only accounted for 2% of the total, the BMA’s data shows. Back in 2015 ILW’s accounted for over 5%, but the global catastrophe losses that year were much lower.

Property retro cessions were 6% of the total in 2017, compared to over 11% in 2015. But again, the much higher level of losses in 2017 likely drives much of the changes in where losses were ceded, aside from the growth in quota shares.

Overall, in 2017 Bermudian re/insurers also reduced their catastrophe exposures by around 2%, the BMA said, part of the reason for which will be the sectors increased use of third-party reinsurance capital and ILS.

With re/insurers increasingly having their own in-house ILS units, funds and sidecars, the sector is leveraging the appetite of investors to reduce its exposure to catastrophe risks, as shown by the lowering of exposure and the higher levels of losses ceded.