The threat that excess industry capital and capacity poses to insurance and reinsurance companies is perceived as a higher risk by Bermudian firms than it is by the rest of the world, reflecting the fact that Bermuda’s re/insurance market remains perhaps the most affected by the growth of alternative capital and ILS.
While Bermudian reinsurers are heavy users of alternative capital and insurance-linked securities (ILS) for their own retrocession and hedging needs, as well as being the first to adopt utilising third-party capital alongside their own, they still recognise the threat it poses to their businesses.
The Insurance Banana Skins 2017 survey from the non-profit think-tank the Centre for the Study of Financial Innovation (CFSI) and which is conducted with support from PwC, found that the 49 Bermuda-based insurance or reinsurance firms saw excess capacity as still a top-ten threat to their businesses.
Conversely, the global view, from 836 re/insurance practitioners, put the availability of capital and how it impacts the industry down at its 20th most significant risk, compared to Bermudian companies putting it at 10th.
Bermudian re/insurers also recognise competition as their 7th greatest risk, with the global view putting it at 8th.
One survey participant commented that; “Oversupply of capital drives poor pricing behaviour.”
The soft reinsurance market we see today results from two things, over-capacity and the shift to a more efficient business model driven by the growth of ILS.
In Bermuda the market has been at the forefront of both accumulating excess capital and developing mechanisms to enhance their own capital efficiency, by working directly and alongside third-party investors.
So it’s not surprise that the threat from capital as seen as greatest in that market, although it does also perhaps signal that while Bermudian re/insurers are among the most active users of ILS capital, they are not yet shifting their business models sufficiently to position themselves as most likely to benefit from the trend.
As ILS increases in importance and alternative capital continues to grow, while reinsurers shift to business models that seek to extract fees from underwriting for third-party capital, managing investor money and running their own ILS vehicles, you would expect the competitive threat to die down as a balance between their own and others capital is found.
We’re clearly not there yet, with the soft reinsurance market continuing to soften, competition still extremely high, and re/insurers still largely in the very early days of adjusting to the shifting times and capital base that underpins the industry.
While excess capacity is seen as a higher risk by Bermudian re/insurers, the fact is that it also presents them with perhaps the greatest opportunity, given the wealth of experience available on the island and as ILS capacity is still largely focused on property catastrophe reinsurance risks, an area where Bermuda’s market excels.
The prominence of excess capacity in the survey responses has dropped somewhat, from previous years. Having been the top perceived risk for reinsurers for a long-time now, its slipped down the global list as other issues have taken priority in recent years.
But it remains a key threat, particularly to Bermuda and the Lloyd’s market for those unable or unwilling to adapt quickly enough, where the risks underwritten are perhaps the most attractive to ILS investors.
At the same time it could be the biggest opportunity the companies have to navigate other market challenges more effectively. They need to adapt to new regulation, threats from technology start-ups and get to grips with underwriting new classes of business, such as cyber, and efficient capital could be just the vehicle to help make them more competitive.
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