As Bermuda reinsurers pile into specialty risk, expect commoditisation

Analysts at Keefe, Bruyette & Woods warn in a report that Bermudian insurance and reinsurance firms rush into specialty risks, in a search for premiums outside of the competitive catastrophe re/insurance market, will only speed up commoditisation.

The KBW analysts, led by Meyer Shields, highlight the “nearly uniform targeting of specialty business” by Bermuda re/insurers as they look to replace or diversify away from the now much reduced property catastrophe rates and warn that this will lead to intensifying price competition in specialty lines business.

KBW participates in the analysts conference calls for the Bermudian insurers and reinsurers and notes that during the recent Q2 calls almost every CEO communicated their strategies of targeting both growth and diversification through an increased focus on specialty insurance and reinsurance lines.

As all the Bermuda re/insurers pile into specialty business together, diverting capacity to these lines, KBW believes that this will result in greater price competition in the near-term. That could make Bermuda re/insurers worst nightmare come true, that they move out of property catastrophe due to prices falling below their return on capital requirements only to find that the business they replace it with suffers the same fate.

KBW is not just concerned about the future profitability of this business, it actually feels that even business written in 2014 may prove to be less profitable than many underwriters think. In order to gain this specialty premium growth KBW says that underwriters must be doing something to win the business from existing carriers, likely relating to one of broker relationships, compensation, terms, conditions, coverage details etc.

This could be a dangerous strategy. As one market (property catastrophe) becomes unattractive, moving wholesale into another with a competitive nature to offer better terms and pricing to win business can only result in a downward spiral with regards to specialty rates.

If KBW is right this is a prime example of a race to the bottom being led by the incumbents, who’s competitive need to deploy premiums somewhere, could just end up cannibalising the profitability of the new sectors they are choosing to focus on.

KBW notes that it could be a year or two before we find out whether there has been a meaningful relaxation of terms and conditions on 2014 year specialty business. It could be even longer before we see any insurers or reinsurers backing out of the market as a result of it no longer meeting their return on capital requirements.

Another risk is that lower-cost ILS and collateralized reinsurance players keep a firm grip on many property catastrophe risks, while increasingly they too seek to move into specialty. That could exacerbate any competition and commoditisation in the specialty market, which could leave the insurers and reinsurers who have been looking to specialty risks as a safe haven with little in the way of places to hide.