Why Bermuda Is The World’s Climate Risk Capital

Insurance penetration is disproportionately low in developing countries, meaning that when natural disasters strike, there is often a lack of funds to fuel the recovery effort, leaving livelihoods ruined and communities uprooted.

According to a report[i] by Aon plc, in 2020 there were 416 natural catastrophe events that generated US$268 billion in economic losses globally, of which US$97 billion was covered by private-sector or government insurance programmes. This measures the protection gap at 64 per cent.

Climate change adds to the urgent need for solutions. The warming of the planet is bringing rising sea levels and changes in weather patterns, resulting in more intense storms and more devastating floods, heatwaves, and wildfires. This year’s “once-in-a-century” flooding in western Europe and China and devastating wildfires sweeping across the western United States are further reminders of this ongoing change.

Bermuda’s re/insurers, who today represent more than one-third of the global property and casualty reinsurance market, are acutely aware of this trend. Bermuda companies have paid out more than a quarter of a trillion dollars over the past 20 years in claims stemming from disasters in the US and European Union alone.

New Industry Model

Bermuda’s history of leading the world in taking on the risk of disaster-prone regions dates back to 1992 when Category 5 Hurricane Andrew ripped a path of destruction across Florida and the Gulf Coast. The resulting property claims of about US$15.5 billion (nearly US$30 billion in today’s dollars), led to 13 US insurers folding. The stark reality was that insurers’ risk exposures were far greater than they had realised.

The response was a new model for the industry, with reinsurers playing a greater role in shouldering the growing risks. A wave of new companies incorporated in Bermuda as this was the place from which capital could be most efficiently and rapidly deployed. The so-called Class of 1993 filled an urgent need to plug a hole in property insurance capacity left by Andrew and introduced a more scientific approach.

This scenario has been repeated over time. Each market dislocation emanating from a major loss event, such as the 9/11 terrorist attacks of 2001, or the hurricane seasons of 2004 and 2005 and, most recently, the COVID-19 pandemic, has brought new capital, new ideas and new companies to Bermuda.

The Bermuda market has diversified beyond the property-catastrophe risk and it is probably best known for, into many different lines, including healthcare, professional liability and life; and research by the Association of Bermuda Insurers and Reinsurers (ABIR) found that half of all US mortgage insurance in 2020 was backed by Bermuda-based reinsurers. The breadth of global economic activity underpinned by the Bermuda market is constantly expanding.

Concentration Of Expertise

Our ABIR member companies have built an extraordinary talent base, second to none in the areas of modelling, analytics, and underwriting risk. This concentration of expertise has helped the Bermuda market become a hotbed of innovation, capable of responding to the world’s evolving risk-management needs.

It is a natural progression for the island to become the world’s climate risk capital, as a market with a rich pedigree in catastrophe re/insurance and accumulated knowledge and expertise in the science of catastrophe risk management.

Enhancing that expertise is Bermuda’s unparalleled track record in ocean science research. The Bermuda Institute of Ocean Sciences (BIOS) has maintained the longest-running time-series on seawater chemistry, biology and physics – going back more than 60 years. The data from samples taken by the BIOS research vessel in the Sargasso Sea constitute a significant contribution to the world’s understanding of how climate change is affecting the oceans.

For many of the past 30 years, BIOS has actively worked with Bermuda’s re/insurers and with universities training young professionals going into the financial-services industry to provide them with a scientific understanding of climate risk.

As the world grapples with the uncertainties of how climate change will impact different regions and industries, Bermuda’s role has never been more globally relevant. Of particular urgency is the need to find affordable and practical insurance solutions to narrow the protection gap.

The Insurance Development Forum (IDF) is leading efforts to provide greater resilience and protections for the people of developing countries, particularly as natural disasters are expected to become more frequent and severe as the atmosphere continues to warm. The IDF quotes research[ii] showing that even a 1 per cent increase in insurance penetration can reduce the disaster recovery burden on taxpayers by 22 per cent, so the potential to change lives for the better is significant.

ABIR member companies have joined with the IDF in committing US$5 billion to re/insurance capacity to developing nations by 2025. They have also lent their expertise, most notably in the IDF’s Bermuda-led project to develop an accessible, open modelling platform to greatly improve predictive capabilities in disaster-prone regions.

Ian Branagan, Chief Risk Officer of RenaissanceRe Holdings, an ABIR member company, chairs the IDF’s Risk Modelling Steering Group. In an ABIR special report, Branagan said the biggest change in the last 25 years in catastrophe modelling had been the move from models based largely on historical statistics to physical models that are much better suited to analysing the changing conditions that climate change will bring.

Ekhosuehi Iyahen, Secretary-General of the IDF, values Bermuda as an important partner in its work. “We can't talk about climate risk without referencing the important role of Bermuda, it's a real hub of expertise,” she said in October last year.

Innovation within the Bermuda market is also being actively encouraged by the regulator. In April this year, the Bermuda Monetary Authority (BMA) introduced a team to provide regulatory guidance and support for those pursuing innovative ideas to address climate risk and the protection gap. The BMA provides a regulatory sandbox, a safe place where new business models can be tested. When Bermuda innovation and entrepreneurship prevails, consumers around the world benefit.

The BMA is also mindful of the importance of climate risk to the Bermuda re/insurance market. In the Climate Risk Survey of re/insurers which the BMA published in March this year[iii], the regulator declared its intentions to conduct a climate-risk exposure assessment trial run, increase engagement with insurers on the findings coming out of the survey, and gradually integrate broader Environmental, Social and Governance (ESG) considerations into its supervisory framework.

A practical example of how Bermuda plays a role in closing the protection gap is the Class 2 mutual insurer African Risk Capacity Insurance Company Ltd. (ARC), established on the island in 2014 by the member states of the African Union to help African governments improve their capacity to better plan, prepare, and respond to extreme weather events and natural disasters. ARC provides the financial mechanism by which weather risks across the continent can be pooled and transferred to international risk markets. ARC has made US$61 million in payouts for early responses and provided more than US$600 million in drought coverage, assisting 2.1 million vulnerable people.

Alternative risk transfer mechanisms such as insurance-linked securities (ILS), including catastrophe bonds, have proven successful in matching capital with catastrophe and other types of risk and could play a significant part in addressing climate risks and the protection gap. This road also leads to Bermuda as the world leader in ILS. According to the alternative risk transfer publication Artemis[iv], global ILS outstanding issuance stood at a record-breaking US$46.4 billion at the end of 2020, of which approximately 93 per cent of the total was listed on the Bermuda Stock Exchange[v].

As we look towards the decades ahead, two things are clear: there is no greater challenge for the world than coping with climate risk and there is no better place to find solutions than Bermuda.

Footnotes:

[i] Aon, Weather Climate and Catastrophe Insight: 2020 Annual Report, Aon, January 2021, https://www.aon.com/global-weather-catastrophe-natural-disasters-costs-climate-change-2020-annual-report/index.html?utm_source=prnewswire&utm_medium=mediarelease&utm_campaign=natcat21

[ii] Insurance Development Forum, “Mission, Vision, History”, https://www.insdevforum.org/mission-vision-history/

[iii] Bermuda Monetary Authority, 2020 Climate Change Survey Report, March 2021, https://www.bma.bm/pdfview/5274

[iv] Artemis, Q4 2020 Catastrophe Bond and ILS Market Report, https://www.artemis.bm/wp-content/uploads/2021/01/q4-2020-catastrophe-bond-ils-report.pdf?utm_source=ReportsPage&utm_medium=Link&utm_content=Q42020Report&utm_campaign=Report

[v] Bermuda Stock Exchange, “Bermuda Stock Exchange Reports Record-Breaking Success for 2020”, 11 January 2021, https://www.bsx.com/media/press%20releases/2021-01-11-BSX%20Year%20in%20Review%202020%20(final)%20(003).pdf

John Huff
John Huff is the President and CEO of the Association of Bermuda Insurers and Reinsurers. In 2016, he served as president of the National Association of Insurance Commissioners (NAIC). He has over 25 years of experience within the insurance sector.