New stress tests undertaken by the Bermuda Monetary Authority (BMA) have affirmed that reinsurance remains a “key mitigation tool” for property and casualty insurers on the island to manage their catastrophe exposure.
The BMA carried out the tests in partnership with UK regulator the Prudential Regulatory Authority (PRA) to assess the impact of natural catastrophe and economic scenarios on nine Bermudian P&C insurers with business both in the UK and on a global basis.
It found that net losses were notably reduced by reinsurance recoveries, with the biggest contributor being fully collateralised structures funded by the capital markets.
For peak peril scenarios, more than 70% of the losses were ceded out, with the highest reinsurance ceded ratio observed for Cal EQ + Aftershock at 81%.
Additionally, no significant concentration to any single reinsurer or reinsurance group was identified from the exercise.
The largest concentration to any one third-party reinsurance group was less than 5% of the total recoveries, although the proportion of losses ceded to intra-group reinsurance is higher and remains important for some insurers.
The majority of the collateralized recoveries were found to be backed by cash or cash equivalent types of assets, which highlights that market or liquidity risk is remote under these collateral arrangements.
The BMA and PRA felt that the results of their stress tests highlighted the critical role fully collateralised vehicles have in offering reinsurance capacity.
“One of the key benefits for cedents using fully collateralized vehicles is the minimisation of credit risk that is typically observed in traditional reinsurance arrangements,” they noted.
“On the other hand, the availability of alternative capital following adverse catastrophe experience could show different behaviour patterns than traditional reinsurance capital. Investors’ appetite for contributing new funds or continuing to invest existing funds could wane more steeply, or existing collateral might be trapped, thus affecting the capacity of new reinsurance.”
The most relevant experience is the reaction of the alternative capital market to the 2017 adverse catastrophe experience where alternative capital continued to grow in 2018, albeit at a reduced rate.
It is worth noting that these stress tests were carried out in 2019 before the COVID-19 pandemic broke out. The BMA has since initiated a proactive assessment of the pandemic’s impact on the re/insurance industry in Bermuda.
