by Jonathan Kent
Adapting to climate change will be one of humanity’s greatest challenges in the coming decades. Scientists expect the warming of the planet to increase the frequency and severity of natural disasters such as windstorms, floods, droughts and wildfires. The evidence indicates it’s already happening.
In 2021, natural catastrophes caused insured losses of $130 billion – 76 per cent above the 21st-century average – according to Aon’s 2021 Weather, Climate and Catastrophe Insight. An additional $213 billion in losses from these events went uninsured. There were 50 events that each caused economic losses of $1 billion or more.
Population growth and new development mean risk exposures are growing. Catastrophe risk management approaches will need to evolve to meet the challenge, with underwriting capacity, risk mitigation and closing of the protection gap in developing economies all areas of focus.
Bermuda is stepping up to the plate to confront these challenges head-on and has claimed the mantle of “climate risk finance capital of the world”.
On May 24, the Bermuda Climate Summit, an invitation-only event presented by the Bermuda Business Development Agency in partnership with the Association of Bermuda Insurers and Reinsurers, will welcome thought leaders in the climate risk space to Rosewood Bermuda to exchange ideas on solutions. Despite its small physical size, there are good reasons why the island can be a giant in climate risk finance.
1. Catastrophe risk expertise
Bermuda reinsurers make up about 36 per cent of the global reinsurance market, based on net property and casualty premiums earned, according to credit rating agency AM Best. The island’s share of the catastrophe reinsurance market is even higher. Bermuda shoulders about 60 per cent of hurricane risk in Florida and Texas, for example. It’s not surprising then that the island is home to some of the world’s greatest catastrophic risk experts. Since the first wave of catastrophe reinsurers set up in Bermuda to fill the gap in capacity left by the devastating 1992 hurricane Andrew, there have been several waves more. Ian Branagan, chief risk officer at Bermuda reinsurer RenissanceRe, sits on the Modelling Steering Committee of the Insurance Development Forum, an organisation that works to narrow the “protection gap”, a term that refers to the lack of insurance penetration in developing economies – an issue whose significance will attract ever greater attention as the planet warms and disasters grow more devastating. Albert Benchimol, the chief executive officer of Axis Capital, and John Huff, CEO of ABIR, also sit on the IDF’s Steering Committee.
2. Claims-paying track record
If a natural disaster occurs anywhere in the insured world, then a healthy portion of the claims payouts that enable stricken communities to recover will likely be paid from Bermuda. The island’s reliable claims-paying track record inspires credibility in the jurisdiction as a global reinsurance hub. Between 2016 and 2020 alone, the island paid out claims of $209.6 billion to US policyholders and cedants, for large catastrophes, property and casualty losses and life insurance claims, according to Bermuda Monetary Authority data. Bermuda reinsurers paid out around 30 per cent of claims emanating from hurricanes Katrina, Rita and Wilma in 2005, and the same proportion for Harvey, Irma and Maria, another terrible trio of storms in 2017.
3. Culture of innovation
To thrive over time on a tiny, mid-Atlantic island requires ingenuity, so it is fair to say that innovation is in the Bermudian DNA. The re/insurance industry is itself an example of that. Over the past decade, Bermuda’s world-leading insurance-linked securities market opened the door to billions of dollars of extra reinsurance capacity, by providing a platform for capital market investors to gain short-term exposure to risk markets. Of the more than $20 billion in ILS issuance last year, $14 billion provided property-catastrophe coverage, eclipsing the previous record of $12 billion set in 2020, according to data published by risk transfer website Artemis.bm. Future climate risk solutions will include greater public-private collaboration. The island is establishing a track record in this area, for example through cat bonds issued through Bermuda special purpose insurers by the likes of Florida state-backed insurer Citizens and by the California Earthquake Authority, as well as by being home to the African Risk Capacity Insurance Company, which helps governments cover catastrophe risks in developing countries – a blueprint for closing the protection gap.
4. Regulatory excellence
CEOs frequently say Bermuda is the best place to base a global re/insurance company. One of the main reasons is world-class regulation from the Bermuda Monetary Authority, which has a reputation for listening to industry and for rapid turnaround time on licensing applications that allows new capital to be deployed as quickly as anywhere in the world. The BMA welcomes innovation, as borne out by its sandbox for new insurance ideas to be tested in a safe place before going to market. Any argument that this constitutes weak oversight will not stand up, given that the Bermuda has earned a stamp of approval from the largest insurance regulators in the world, in the form of Solvency II third-country equivalency from the European Union and reciprocal jurisdiction status from the United States. Climate change is very much on the BMA’s radar too. Its Business Plan 2022 spells out its intention to integrate sustainability principles into its regulation.
5. Science and experience
Bermuda has climate science pedigree beyond the risk-modelling brainpower of the re/insurance industry. The Bermuda Institute of Ocean Sciences runs the longest-running open ocean monitoring programme in the world, spanning six decades and providing powerful insight into the incremental effect of climate change on the ocean. BIOS is also part of the Bermuda Ocean Prosperity Programme — a partnership that involves the Government of Bermuda and the Waitt Institute. The aim is “to foster the sustainable, profitable, and enjoyable use of ocean resources for present and future generations”. Bermuda is also familiar with the repercussions of climate change through practical experience, its stout homes having stood up well to ferocious hurricanes over the decades. With climate change set to bring rising sea levels and more powerful storms, Bermuda’s position as a climate risk leader is in its own interest, as well as that of the world.