The threat will come from the major European reinsurers who have the ability to take a broad spread of their cedants’ risks and as such can mitigate their catastrophe exposures

Katrina and Rita, or “Katrita” as some have termed the twin hurricanes which brought so much destruction and delivered the biggest loss in the industry’s history in the space of just over a month last year, punched a hole in the balance sheets of many Bermudan entities and caused a fundamental rethink in the way the market transacts its business.

Models were found to be woefully inaccurate and the global industry saw the future of North American windstorm cover as bleak, to say the least.

The hurricane experts predicted that this was the start of a new era of devastating hurricanes, which would beat the southern United States at a time when the level of exposures faced by the insurers and reinsurers was finally being properly understood as the reliance on models as the be-all and end-all was ended.

Dealing with the aftermath:
All around the world insurers and reinsurers were feeling the strain, but as some of the “Class of 2001” were looking at their first claims crisis the opportunity for the Bermudan market was clear to see.

As the appetite of the established players for Gulf of Mexico windstorm began to wane the billions of dollars of new capacity was looking for a new home and found the best part of a dozen Bermudan start ups all keen to utlise capacity without the claims legacies of the past.

It was an echo of the events of 2001, after the events of September 11th 2001 turned the insurance market on its head.

But just as the Bermudan insurers had learnt their lessons, so too had the rating agencies.

The demise of Alea and PX Re prompted the rating agencies to take a tougher stance with the Bermudan start-ups than had been taken four years before.

Leading ratings firms made it publicly clear that they were not willing to give their ratings backing to mono line start ups.

It presented a problem for the Bermudan insurers and reinsurers who were looking to utilise their capacity in the areas where the potential for returns were highest and the clamour for windstorm coverage saw the underwriters almost able to name their own price for a risk which had proved to be extremely volatile over the past 12 months after several years where hurricane losses had been within acceptable limits.

As a unit Bermudan reinsurers have traditionally underwritten less coverage per US dollar of its capital than the majority of its competitors in other international centres, but there was clearly a rising demand for cover from an increasingly desperate group of cedants who were keen to play their part in the natural catastrophe sector but wanted to ensure that any repeat of the previous two hurricane seasons would not deliver the same impact to their balance sheets.

A quick fix:
The January 1st renewals saw some of the new Class of 2005 start to have an impact and bring capacity into the sector. Many said they had set targets for the business they wanted to win but few were reporting that they had committed the full level of planned capital at 1/1.

There was talk of the April 1st renewal season seeing increased competition as the new capital made its presence felt.

But faced with a leap in the demand for capacity and believing that the capacity crunch would be a short lived affair the Bermudan companies looked to devise a new solution to the problem – the sidecar.

On the face of it the sidecar is a simple structure, providing the cover so wanted by the market, but using predominately other people’s money.

The majority that have been set up with the backing of private equity and hedge funds, have been writing treaty retrocessional business and many have looked to ensure that they are covered by securitising their potential liabilities.

The Bermudan market says the sidecars deliver a great deal of benefit to the reinsurer who is driving it.

It delivers access to capital and given the short-term nature of the sidecar there is little of the complex administration and with it the cost. If the bubble fails to burst then the Bermudans will be quick to build new sidecars as and when the need arises.

While the sidecars are not a totally new scheme they have become a quick fix to what Bermuda sees as a short-term opportunity.

Tough talking:
However away from those of the likes of Rockridge Re, Cyrus Re, and Blue Ocean Re the Bermudan market is gearing up for some tough talking with their cedants as the end of year renewal season begins in earnest.

There has been much talk in the market of the way in which some Bermudan underwriters have put the majority of their eggs in the hurricane basket with the belief that if the currently docile North Atlantic hurricane season should provide a sting in its tail they will find themselves is serious trouble as the gamble of volatile risks does not pay off. However if the hurricanes fail to materialise then they will have played a superb and very profitable hand.

For some, the wounds of the past two years have yet to heal. They, like their compatriots in London, (many of whom have set up their own operations on the island) do not have the luxury of being able to compete via pricing and many industry experts do not believe there is any underwriters who would be stupid enough to look to cut price levels on the natural catastrophe risks.

Away from the storms there is a feeling that the market will begin to soften, but the threat will come from the major European reinsurers who have the ability to take a broad spread of their cedant’s risks and as such can mitigate their catastrophe exposures.

There is expected to be some tough negotiation for many as the need for price increases are no longer a nice thing to have, but a must have if the underwriters are to do their jobs. The sidecars which have been so popular in Bermuda show few signs of the wheels starting to come off and the hunger from the hedge funds to have a reinsurance element in their portfolio is gathering attractions with every week where the windstorms stay away.

Bermuda is still putting on a positive face but any repeat of Katrina or Rita could leave some with egg on their faces and some empty pockets.

This Special item appeared in issue 109 of JTW News - October 2006

Author: Jon Guy - JTW News