Business Shifts Could Bode Well for Bermudian (Re)Insurers' Future

Bermudian (re)insurers' underwriting performance has improved in recent years, and recent strategic shifts in their underwriting practices could bode well for their future, according to S&P Global Ratings.

But, natural catastrophe losses have exceeded their budgets from 2017 to 2022, and the combination of heightened natural catastrophe losses, persistently high inflation, and potential shortfalls in loss reserves could pose roadblocks for Bermudian insurers and reinsurers, S&P says.

In a new report, Bermudian Re/Insurers Set Their Sights on a Brighter Future, S&P notes that favorable pricing conditions and a focus on profitable diversification have allowed Bermuda's insurers and reinsurers to absorb volatility within their earnings.

The rating agency says it believes that Bermudian (re)insurers improving operating profitability should not only boost their capitalization but also potentially enhance their competitive positions and provide stability to their credit ratings.

The September 5, 2023, S&P report acknowledges the difficulties Bermudian (re)insurers have faced in recent years including the large natural catastrophe losses, risks that emerged from the COVID-19 pandemic and the resulting inflationary pressures, and the impact of the ongoing Russia-Ukraine conflict.

Those difficulties prompted the island's insurers and reinsurers to stress underwriting discipline, including their pricing strategies and diversification into less volatile lines, the S&P report says. "S&P Global Ratings thinks these efforts have not only enabled (re)insurers to absorb earnings volatility but also have yielded stronger underwriting profits, as performance in the past two years and in the first six months of 2023 indicates. This provides stability to the credit ratings," the report says.

S&P says the Bermudian (re)insurers it rates collectively posted a combined ratio of 93.5 percent in 2022, an improvement from 97.0 percent in 2021 and from the 5-year average of 101.5 percent over the period from 2017 to 2021. That improved 2022 combined ratio came despite the group of (re)insurers absorbing 9.6 percentage points of natural catastrophe losses during the year, the rating agency says.

"The positive trend continued in the first half of 2023, with the combined ratio improving further to 85.9 percent," the report says. "Nonetheless, Bermudian (re)insurers could face numerous obstacles, such as heightened frequency and severity of catastrophe losses influenced by the effects of climate change, inadequate loss reserve provisions, and financial market volatility."

Bermudian (re)insurers wrote $77.8 billion in gross premiums in 2022, S&P says, a 12.2 percent increase from the prior year. Reinsurance—including both property-casualty and life—represented 53.6 percent of the year's total gross premium written with insurance, including mortgage insurance, accounting for 46.4 percent.

The S&P report notes Bermudian (re)insurers' efforts to diversify in recent years as they recognize the role diversification can play in mitigating business volatility and strengthening earning. They're doing so by expanding their presence in less volatile lines of business, the rating agency says, with some even moving into new regions.

"We believe the need to diversify has emerged in response to elevated catastrophe losses, as well as to take advantage of favorable pricing in certain insurance lines and to enhance underwriting cycle management," the report says.

While the distribution between insurance and reinsurance premiums written has remained relatively stable among Bermudian companies in recent years, some companies have shifted their business mix, according to S&P. While some have grown the size of their insurance books of business, others have increased their reinsurance writings, the rating agency says.

Companies' diversification efforts—as well as their perception of risk-reward opportunities—have led some (re)insurers on the island to move into new lines of business, S&P says. Mortgage reinsurance, cyber, and renewable energy have all seen increased interest from Bermudian companies, the report says, noting that substantial increases in the cyber market in 2021 and 2022 drew new capacity to that market.

While saying that major Bermudian companies boosting their cyber writing have strong risk management capabilities, the S&P report cites the relative newness of the cyber (re)insurance market. "Third-party industry models for this business are not as mature as they are for other forms of severity risks, such as property catastrophe named peril risk," the report says.

Mortgage (re)insurance business offers a similar source of profitability while diversifying earnings, the S&P report says. Loss trends in the mortgage (re)insurance lines are less correlated with traditional (re)insurance business, enhancing the potential benefit.

But, "Although the loss experience in this particular line of business has been relatively favorable, the inherent risk in this business is quite complex," the S&P report says. "It necessitates that (re)insurers possess robust risk modeling capabilities, stronger governance for overseeing risk tolerances, and controls. If not well managed, this line could become another source of earnings volatility."

Bermudian (re)insurers' diversification strategies allowed them to absorb large catastrophe losses and post strong underwriting profitability in 2022, despite the challenges they faced, S&P says.

While Bermudian (re)insurers' natural catastrophe budgets appear to have been insufficient in recent years, this year they implemented significant changes to their pricing and underwriting practices. They've increased attachment points on reinsurance business, reduced limits, and made substantial adjustments to rates across all accounts.

"It is early to determine the effectiveness of these adjustments," the S&P report says. "But considering the losses primary insurance companies shouldered in the first half of 2023 (especially in the [United States]), it is reasonable to say that 2023 is looking promising for the Bermudian (re)insurers."

Ultimately, substantial rate changes—particularly in short-tail lines of business—along with fundamental shifts in underwriting and improved investment returns could produce positive results for Bermudian (re)insurers, the S&P report says. Still, there are potential obstacles, including catastrophe losses, the increasing frequency of secondary perils, and high inflation, making underwriting discipline and effective risk selection essential.