WILL THERE BE A CLASS OF ’23?
Bermuda’s catastrophe bond market is enjoying a record year, but Bermuda Managing Partner Brad Adderley probes why more new capital has not come into the hardest market in decades.
BERMUDA’S REINSURANCE INDUSTRY HAS BEEN CHARACTERISED BY A SERIES OF WAVES OF NEW COMPANIES FORMING IN RESPONSE TO SHORTAGES OF CAPACITY IN PARTICULAR SECTORS.
This began in the 1980s when excess of loss re/insurers ACE and XL were formed when capacity in this area dried up in the US, and was followed in 1992 when Hurricane Andrew led to an influx of catastrophe reinsurers. The 9/11 terrorist attacks in 2001 brought another wave of companies to Bermuda.
But in the current hard market—during which there has been probably the biggest and most sustained increase in rates since the early 2000s—there has not been a similar wave of incorporations.
Brad Adderley, who has been closely involved with some of those previous waves as an insurance lawyer at Appleby for more than 25 years, is curious about why this should be.
He thinks the leading cause is that despite the rise in premiums and the vastly improved earnings most re/insurers have enjoyed in 2023 to date, investors are still waiting to see if this is another false dawn, or if they are actually going to get a return on their money.
Adderley, the managing partner of Appleby Bermuda and the re/insurance team leader for the firm, says: “The market is probably the hardest market we’ve had for a long period. When you had a market like this in the past, you would have seen an influx of capital in two or three months.
“In the 2001 class for example, people raised anywhere between $800 million to $1.6 billion in six weeks. Six to eight vehicles were formed very fast, which was great.
“In this current market, we have the highest prices we’ve had for a while. In underwriting, the terms themselves are improving. So that’s two things in your favour; the third is you hear about players pulling out of the market, so that must help the market as the remaining players use less capacity,” he explains.
“We are not talking about a massive influx of new capital into insurance-linked securities (ILS) funds. We are not reading or hearing about lots of new commercial reinsurers and we haven’t heard about that many commercial insurers raising additional capital to take advantage of the new terms.
“So you would have thought that somewhere the money would have flown in. If we see all these great reasons to invest, there has to be something that counteracts that.
“It’s because investors have had so many years of being told: ‘This is a great differentiator. You’re going to have a hard market, you’re not going to have losses, you’re going to have better terms, better pricing and you’re going to make money’.
“They’ve been told that so many times, and it never came through. In fact, the opposite happened. So now, what is happening? We’ve cried wolf too many times.”
“There are clients who are trying to cover the same risk but in a different region. That’s good because it helps grow the ILS market.”
Adderley says that investors recognise that climate change is injecting uncertainty into the investing horizon, noting this summer’s extreme weather events.
Rising temperatures and frequent catastrophes make investors question whether the reinsurers’ models and projections are accurate.
“If the models have previously been wrong or not accurate or not complete, how can they be right now when the world and the weather systems are changing so much?” he asks.
“As a result, is it really possible for the terms of the pricing to be correct? Because, what do we not know? Did you think that you were going to have fires in Canada in June, which were going to adversely affect New York?
“That probably wasn’t envisioned, nor was the whole south of Europe having record temperatures, or record heat waves in America. It’s not a pocket—it seems to be everywhere.”
Adderley says rising interest rates may play a part as investors can put their money in less volatile sectors and get a return.
But, he notes, this may not be bad for the property reinsurance and ILS markets, because the lack of capacity should ensure that rates remain high for some time.
He is seeing re/insurers and ILS participants looking at either specialty lines such as cyber or new geographical regions and countries.
“Clients are approaching us about new territories or new regions for collateralisation, whether it’s just a simple ILS product or a cat bond,” he says. “There are clients who are trying to cover the same risk but in a different region. That’s good because it helps grow the ILS market.”
Indeed, despite the lack of a massive influx of new capital, 2023 has been a very good year for ILS, especially for catastrophe bonds.
“The transactions have become bigger and more complex and from everything you read, it has been a record year for cat bonds,” Adderley says.
“So when we say cat bonds have grown, you would think maybe the whole market would have expanded, not just the cat bonds themselves.
“But you haven’t heard anything about sidecars, or about new or existing ILS funds raising a lot more capital. One or two have, but that is it, and there have been more redemptions from other investors from other funds.
“I do think that we are seeing a growth generally in types of risk regions and investors. Is it as fast as it needs to be? That’s a separate issue. But it’s still moving in the right direction. Maybe the question is: what happens if this is a clean year with no losses? Are we going to see an increase in new entrants, which then helps us drive a soft market? Or are we going to see a soft market anyway as a result of having losses?”
Despite the uncertainty in some areas of business, Adderley remains bullish on Bermuda generally, noting it remains a leading insurance innovator.
“Bermuda is one of the few places in the world that is a proper marketplace,” he says. “It has real expertise: people who live and work here. That helps encourage transformation.
“In other jurisdictions that might be more difficult to sustain or keep going, but in Bermuda you have everyone on the streets doing insurance and reinsurance. It makes it easy to do a new transaction. Bermuda has always been an incubator and I don’t see any reason why that won’t continue.”
Adderley points to the decision by European life insurer Aegon to move its legal domicile to Bermuda as an example.
“That says something positive about Bermuda. We’re doing something right,” he says. “Bermuda’s internationally respected regulatory regime, and highly innovative and collaborative insurance market, are second to none.”
First Published in Bermuda:Re+ILS, September 2023
For further information, please contact:
Brad Adderley, Partner, Appleby