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Hard market is unlike any before: Bermuda CEOs

Hurricane Ian and other recent loss events have exposed the lack of hard market experience among many underwriters and brokers, executives said

The current hard market will last a long time as ‘investors have lost their appetite for re/insurance risk’, senior executives tell the Bermuda Risk Summit

Bermuda’s re/insurance leaders have predicted a long hard market because of a lack of new capital.

Speaking during a panel discussion at the Bermuda Risk Summit, senior executives agreed the market today was unlike any they had seen before.

“In 50 years I have never seen a market quite like this,” Stephen Catlin, chairman of Convex Group, said.

“The main reason for that, in my view, is investors in whatever shape or size, whether it be private or public, have actually lost their appetite to invest in the insurance balance sheet. And the reason for that is the returns in the past 10 years are just grossly inadequate for the risks we take as an industry.”

Catlin added: “People talk about new capital coming in – it will happen at some point, I agree with that completely – but do I see it happening anytime soon? No, I don’t.”

Inflation alone will “consume” any extra capital, he said, while a number of separate issues that have come together, including the coronavirus pandemic, extreme weather events and the war in Ukraine, are all “putting stress on the balance sheet”.

Christopher Schaper, chief executive of AIG Re and deputy chairman of the Association of Bermuda Insurers and Reinsurers, said the hard market of 2001 in the wake of the September 11 terrorist attacks was different from today in that re/insurance companies then faced rating downgrades and yet there was still new capital coming into the market.

“At that time we had transactions falling off our desks,” Schaper said, “and new companies were starting up quite substantially here in Bermuda.”

In the current hard market, however, there is insufficient capital for the creation of start-ups and any additional capital will choose instead to come into existing businesses, he added.

Re/insurance executives are losing sleep, Schaper said, because of the growing “interconnectedness” of risk.

“I’m not that concerned about the economic environment because we’ve been able to move through different economic cycles before. Inflation is about 9.8% but it was higher than that 10 years ago. We can handle economic uncertainty, but when you look at the interconnectedness of risk, that is extremely problematic,” he said.

The confluence of unexpected events that culminated in losses incurred from Hurricane Ian exposed the lack of previous experience of a hard market among many underwriters and brokers in the run-up to the January 1 renewals, Peter Bell, chief executive and managing director for Bermuda at Everest Reinsurance, said.

Everest Re, he said, had ensured its own underwriters could count on guidance from senior management.

“We started messaging clients and brokers very early, at Monte Carlo and at CIAB [the Council of Insurance Agents & Brokers conference], as to what the price increases needed to be, but the biggest problem is there weren’t that many underwriters or brokers who had been in the previous hard markets,” he said.

On systemic risk, most companies are “very well capitalised at the moment and are working with better data”, Bell said. The key, he added, is to work within “clear risk tolerances”.

Megan Thomas, chief executive of Hamilton Re, said the “fear factor” created by the “unmodelled or lightly modelled event” had caused a “lot of chaos” in the lead-up to the January 1 renewals. She added a very good outcome of this hard market has been the improvements to terms and conditions and the structure of contracts.

“The pricing strength that is needed is continuing,” Thomas said, “and the early indications of the Japanese renewal season are about 25% to 35% are already covered, so there’s a significant uptick coming through for April 1 in terms of the experience of January 1.”

The dynamics that all came together over the past two to three years were “very unusual and independent of balance sheets”, she said, but profitability is key.

“We’ve done a good job in getting through the past few months. We just need to be disciplined and have a continued view on underwriting profitability, to deliver the returns that are needed and keep us as sustainable as we can be as an industry.”

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