Bermuda has attracted billions of dollars of new re/insurance capital over the past year, but the pace of the multiyear growth in third-party structures such as insurance-linked securities has slowed.

That is the view of analysts from ratings agency AM Best in a report entitled, “London and Bermuda attract capital as market conditions improve”.

Hardening rates have attracted new money into the market, but the report states there are “significant uncertainties ahead in terms of the supply-demand balance for both commercial insurance and reinsurance”.

The report details the billions of dollars in debt and equity capital raised by Bermudian-based start-ups, such as Conduit Holdings and Vantage Group, as well as incumbents including Arch Capital, Everest Re, Fidelis, Hiscox and RenaissanceRe.

However, AM Best believes the new capital, while “not insignificant”, does not “represent a material addition to industry capital, particularly when combined with existing third-party capital capacity”.

The report adds: “Nevertheless, new capital flowing into the industry, and the resultant increase in capacity – through start-ups, scale-ups and capital raises by existing players – could have a dampening effect on price improvements. However, it should be noted that there are other so-called ’moving parts’ in this equation that could influence prices.”

The AM Best analysts note: “A portion of the additional capital raised in 2020 has already been required to absorb adverse prior-year loss reserve development and upward revisions in Covid-19-related loss estimates. And the extent to which losses related to Covid-19 have been recognised by insurers going into 2021 remains unclear.

“The impact that the economic consequences of the pandemic will have on demand for insurance is highly uncertain and will largely depend on the length and depth of the economic downturn. As economies shrink, so does the value of insurable risk. But when businesses come under financial pressure, their appetite to retain risk may also reduce – increasing demand for insurance cover.”

Reinsurers may also see rising demand from their customers, insurers, who may find themselves in a constrained financial position because of underwriting losses and the impact of pandemic-driven volatility on their assets. These factors could offset the potentially dampening effect on prices of the new capital.

This is a favourable time for start-ups to be entering the market, AM Best said. However, apart from the usual hurdles of gaining licences, capital and ratings, “start-up re/insurers in 2020/21 also face the unique challenge of creating an organisation’s internal culture and gaining acceptance in relationship-driven markets during a period when remote working is the norm”, Best stated.

The ratings agency observed that “new companies benefit from clean balance sheets that are unencumbered by legacy claims. This is particularly pertinent at a time when more market participants are strengthening reserves for US casualty business.

“The absence of legacy systems could also be a positive, as these companies are able to use the latest technology to support, for example, the collection, processing and analysis of data.”

Bermuda is the world leader in insurance-linked securities, which have grown at a brisk pace in recent years. Third-party capital continues to flow into the market, but the pace has tempered, following a period of high-severity losses, Best said.

Issues surrounding collateral release, particularly related to catastrophe events in 2017 and 2018, had led to a re-evaluation of return requirements and governance structures.

“Longer than anticipated claims settlements associated with some catastrophe losses – particularly Hurricanes Irma and Maria, the Californian wildfires and Typhoon Jebi – have also caused both investors and capacity users to pause and assess what changes need to be made in underlying agreements,” Best reported. “This may lead to a more measured use of alternative capital structures going forward.”