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It’s not all safe in the Bermudian haven: Excess catastrophe losses and emerging risks in recent years make for an uncertain future, says S&P Global

“Bermudian reinsurers and insurers (re/insurers) have had their fair share of difficulties in the past six years. They've weathered large natural catastrophe losses year on year, unique risks that emerged from the pandemic and the subsequent inflationary pressures, and the ongoing Russia-Ukraine conflict”, state S&P Global Ratings Analysts Saurabh B Khasnis and Taoufik Gharib in a recent comment on the situation of Bermuda-based re/insurers.
Written on 09/20/23

This article summarizes key findings from the comment “Bermudian Re/Insurers Set Their Sights On A Brighter Future” published online by S&P Global Ratings on 5 Sep, 2023. You can read the article here (Log-in free of charge)

The Bermudian re/insurance industry has witnessed a notable improvement in its underwriting performance in recent years and through the first half of 2023. This positive trend has been driven by favorable pricing conditions and a strategic focus on profitable diversification, which has allowed companies to better absorb earnings volatility. Despite these encouraging developments, several key challenges and risks persist for insurers operating in and from Bermuda.

1. Natural Catastrophe Losses: One of the significant challenges facing Bermudian insurers is the recurring excess of natural catastrophe losses over their budgets, which occurred between 2017 and 2022. This has been influenced by factors such as climate change, increased losses from secondary perils like storms, floods, and wildfires, and population growth in disaster-prone regions. These heightened losses have led to a decline in return on equity (ROE) for Bermudian reinsurers.

2. Eroding Capital Buffers: While capitalization remained robust at year-end 2022, the industry has experienced mark-to-market losses, primarily due to rising interest rates. These losses have depleted capital buffers, though they are expected to recover as fixed-income investments near maturity. Strong underwriting earnings and prudent capital management strategies are also expected to support the rebuilding of capital buffers.

3. Diversification Strategies: Bermudian re/insurers have strategically shifted their focus towards diversification to mitigate business volatility and enhance earnings. This includes expanding into less volatile insurance lines and broadening their geographic reach. While diversification presents opportunities, it also introduces new risks, especially in lines such as mortgage reinsurance and cyber insurance, which require robust risk modeling capabilities and governance.

4. Shifts in Underwriting Practices: Recent changes in underwriting and pricing practices in the property and property catastrophe lines, prompted by years of underperformance, are viewed positively. However, the effectiveness of these adjustments remains to be seen. Increased attachment points, scaled-down limits, and substantial rate adjustments have been implemented, but their impact on profitability will require monitoring.

5. Persistently High Inflation: Bermudian insurers are contending with persistently high inflation, which can affect loss reserves and investment returns. Effective risk selection and disciplined underwriting will be essential to navigate these inflationary pressures successfully.

6. Uncertain Future: While the future for Bermudian re/insurers seems promising, they continue to face hurdles, including the frequency and severity of catastrophe losses, secondary peril risks, and persistently high inflation. Maintaining underwriting discipline and effective risk selection will be crucial in addressing these challenges and ensuring continued profitability and stability.