Bermuda’s reinsurance market had less catastrophe exposure in 2022, as a result of the hardening of the market, a Bermuda Monetary Authority analysis has reported.

The BMA document said Bermuda insurers are more exposed to the Atlantic Hurricane peril than any other peril, with gross average modelled losses over all companies ranging from $832 million for 1-in-50-year events up to $1.59 billion for 1-in-1,000-year events.

The report said: “Other perils show lower modelled losses for the 1-in-50 and 1-in 1,000-year events with some variation between firms.

“The use of reinsurance is widespread and is generally more pronounced for lower frequency return periods for the Atlantic Hurricane and North American Earthquake perils.”

The Bermuda insurance market is resilient to potential adverse impacts, including the financial market, cat and other underwriting loss scenarios, according to stress test results.

The BMA monitors market trends and developments, prioritising the maintaining of a broad understanding of Bermuda insurers’ catastrophe exposure, including the stress testing analysis and the identification of any concentration of risk in Bermuda.

The assessment of catastrophe risk exposure and stress testing at the micro and macro levels are fundamental elements of the authority’s overall supervisory framework.

Bermuda’s Class 3B and Class 4 insurers are required to submit a capital and solvency return, which includes a catastrophe return detailing the insurers’ cat risk management practices.

They are the largest property and casualty commercial insurers in Bermuda’s market and are required to maintain statutory capital and surplus of at least 99 per cent tail value at risk over a one-year time horizon.

Insurers report cat exposures, exceedance probability curves — for various return periods — their average annual losses and their probable maximum losses. In addition, insurers are required to carry out rigorous and comprehensive forward-looking stress tests to measure the sensitivity of their statutory capital and surplus in various adverse financial market and underwriting conditions.

The cat return also serves as a point of reference in the prudential filings for the quantification of cat risk assumed in Bermuda.

The report draws from the cat returns and gives an overview of the cat risk exposure assumed by Bermuda’s insurance sector. It also assesses the sector’s capacity to absorb shocks from various adverse financial market and underwriting conditions.

The analysis considers whether Bermuda insurers are adequately capitalised to withstand severe but remote losses from various possible events that might adversely impact their balance sheets — ie, statutory admitted assets, admitted liabilities and capital and surplus.

It reviews Bermuda insurers’ levels of reliance on reinsurance, including the identification of risk concentrations.

Catastrophe risk exposure assessment and stress testing allow the authority to evaluate insurers’ capital adequacy under adverse financial markets and underwriting conditions.

The results of the assessment provide a comprehensive understanding of the sector’s general vulnerability to shocks.

Climate change developments, including increased frequency and severity of catastrophe events, affect strategies and outcomes for reinsurers and insurers.

A foreword to the report said: “During 2022, Bermuda’s international [reinsurance and insurance] sector, like other global hubs, faced the risk of pricing challenges derived from the high inflation [real and social] environment and uncertainty of the valuation of assets and liabilities. Furthermore, the unprecedented tightening of monetary policy has driven a sharp increase in the cost of capital.”

Bermuda market companies remain well capitalised to absorb any unlikely and potentially significant losses, with the capital remaining to settle policyholder obligations and meet regulatory capital requirements, the report notes.

The BMA said: “While the 2022 cat events, including Hurricane Ian, have been ‘earnings’ events, they have intensified the hardening rates. This has led insurers to increase retentions, restrict coverage and restructure programmes to control premium budgets.

“Ultimately, this resulted in a decrease in the cat exposure assumed by Bermuda reinsurers.“

The gross loss exposure assumed by Bermuda insurers decreased by 11.51 per cent — from $225.02 billion in 2021 to $199.11 billion in 2022.

Furthermore, the value of global gross estimated potential loss assumed by Bermuda insurers on the major cat perils (combined) has also decreased from $209.47 billion in 2021 to $180.14 billion in 2022; this represents a decrease from 26 per cent to 23 per cent of the global market share.