Re-Insurance

Taxpayer risk an opportunity for reinsurers

  • Panel discussion: pictured at the EY Global (Re)Insurance Outlook event, are from left, are moderator David Brown, John Huff, Fiona Luck, Ryan Mather and Patrick Tannock (Photograph supplied)

One of the biggest opportunities for Bermuda reinsurers will be to take more risk off the shoulders of taxpayers around the world, delegates at a conference in Hamilton heard.

John Huff, chief executive officer of the Association of Bermuda Insurers and Reinsurers, said even a slight closing of the protection gap, illustrated by the difference between insured and economic losses from disasters, would make a huge difference.

“A change by just 1 per cent in the insurance penetration rate could reduce the natural catastrophe costs to taxpayers by 22 per cent,” Mr Huff said, speaking at the EY Global (Re)Insurance Outlook event last week.

Several US public-sector organisations have already taken advantage of some private reinsurance. For example, the Florida Hurricane Catastrophe Fund, which has bought $1 billion worth or private reinsurance for the past four years in succession.

The National Flood Insurance Programme benefited from a $1.46 billion traditional reinsurance programme, as well as a $500 million catastrophe bond, this year.

And the California Earthquake Authority’s private reinsurance programme passed $8 billion for the first time this year.

Mr Huff sees the potential for much more.

“I’m bullish on Bermuda with a theme of de-risking government around the world,” he said. “With the abundant capital that’s in our space, can we de-risk the taxpayers?”

He cited the examples of flood, earthquake, terrorism, crop and mortgage risk. “Who’s holding this risk today?” Mr Huff said. “Most of the time it’s taxpayers and the private sector’s ready to take some of it.”

Fellow panellist Ryan Mather, Argo Group’s head of global reinsurance, saw further growth opportunities in finding solutions for covering the intangibles that make up the bulk of the value of modern corporations.

“Back in 1975, 87 per cent of the value of the S&P 500 was tangible assets — property and inventory,” Mr Mather said.

“Now about 10 per cent of the S&P 500’s value consists of tangible assets. The rest is intangible and we need to find a way of reinsuring that.”

Mr Mather added that anticipated an increase in rates in 2019, given some rattling of market confidence this year.

Rates had not risen significantly this year, despite the massive losses from hurricanes Harvey, Irma and Marie in 2017, he said, as even more capital flooded into the market than that lost to catastrophes. Hence rates did not rise as anticipated.

With more losses this year from typhoons in Japan, Hurricane Michael in Florida and yet more California wildfires, the confidence of some industry investors was flagging.

“This might be the reverse tipping point,” Mr Mather said. “This might be when some of the capital that shouldn’t be in the industry might go and try other things.

“The narrative is changing: so I’m hearing ‘two bad years in a row’, ‘interest rates are going up, making the risk-return hurdle higher’, and ‘are reinsurance rates ever going to go up again?’”

In addition, he said, the effectiveness of models had come into question from the successive “once-in-a-century” wildfire years and the losses from 2017’s Irma proving to be much worse than expected, the latter involving what was thought to be the best-understood catastrophe risk, Florida hurricane.

“For that reason, I think we’re going to see rate increases next year,” Mr Mather said.

Fiona Luck, a non-executive director of the Lloyd’s of London Franchise Board and a former C-suite executive with XL Group, said conversations between underwriters and brokers or clients would determine whether rates would rise.

“I think we can’t get ahead of ourselves,” Ms Luck said. “These are increases over a very, very low level and the old model of having significant, fabulous increases that work for us over a long period of time are probably at an end.

“Capital is efficient in this market — it comes in when there’s a need.”

Patrick Tannock, CEO Bermuda, Axa XL, said: “I think the traditional cycle has been dead for a long time and I think the inflection point was probably the Japanese tsunami.

“In 2011, we had losses of over $100 billion and nothing happened. It used to be that you could set your clock to that and automatically have a hard market.

“We’ve had this predicament for some time in that we haven’t had that balance with respect to exposure and the rates that are available.”

He added: “I don’t think anyone is afraid of volatility, we just want to make sure we get paid for it.”

Progress on realising the oft-stated need for more diversity among the industry’s ranks is still proving to be slow, the panellists agreed. Ms Luck believed the island could play a significant role.

“There has been pressure from shareholders for more diversity but the fact is we’re not doing well enough,” Ms Luck said.

“My challenge to Abir is, we in Bermuda are a leading jurisdiction — let’s make this part of our leadership and let’s really make it a priority.”

She said there had been big efforts to promote the industry in schools and to urge young people to get educated to take career opportunities.

Even those who did shine academically were finding it difficult to land jobs, she added, citing two of her mentees who had passed two actuarial exams and had still struggled to find work.

“We have to find a better way, once they have got an education, of knowing where they are,” Ms Luck said. “Many of them go overseas to look for opportunities.

“I sit on the board of Knowledge Quest [the Bermudian charity]. We have put 180 young people through university over 18 years.

“These are people whose families have never been to university and who’s mum or dad works three jobs, just to get through the process.

“I think there’s a trick we’re missing and that’s capturing data more thoroughly to help us get there.

“Having said all this about promoting Bermudian talent, we’ve also got to be open to immigration, to bring in that talent. That’s what built this industry and we still have to be open to that.”

Mr Tannock said scholarships were helpful in getting young people in the door, but once there they needed a higher level of support.

“Bermuda was built on having an enabling environment for the free flow of high-quality intellectual capital,” Mr Tannock said. “But you’ve got to balance that by developing Bermudians as well.

“It’s a fool’s errand to perpetuate this situation where a certain demographic does not believe they have a chance to participate in the economic engine of the country. That’s just going to result in tears.”

Diversity measurably improved problem-solving, decision-making and cultural awareness in companies, he said. “Here’s a news flash. The world is becoming a lot browner, so people need to get on the bus. We’re making progress but there’s a lot of work to be done.”