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Head of Bermuda Reinsurers Group Presses Private-Sector Role in Terror, Catastrophe Risk

OLDWICK, N.J. April 10 (BestWire) — As the National Association of Insurance Commissioners drafts its public policy position on insurance risk for natural catastrophe and terrorism events, Bermuda reinsurers, which represent some 40% of the U.S. property catastrophe capacity, watch with interest.

The Association of Bermuda Insurers and Reinsurers represents 22 major international insurers and reinsurers domiciled in Bermuda that wrote $43 billion in premium and had $44 billion in surplus at year end 2004. Bradley Kading, president and executive director of the ABIR, gave BestWeek his assessment of the Bermuda climate.

Q. The NAIC is working on a multitiered plan aimed at keeping insurers solvent following a mega-catastrophe. What is your take on the proposal?

A. Bermuda carriers are active providers of property catastrophe reinsurance. We're in opposition to the current draft. The (white paper the NAIC is working on) really contemplates a whole series of government funds that includes a state-level fund overlaid by a federal backstop. Together, these funds squeeze out private reinsurance.

Q. State regulators, such as Florida's Kevin McCarty, have argued that such backstops are needed as the private market could not withstand a cataclysmic event.

A. I agree that there is some level at which a catastrophe can exhaust private-sector capacity and can threaten the solvency of the insurance industry. The question is, what size event is that? We don't know that answer, but it must be an event bigger than what has occurred to date. We do know that the industry is able to respond to large disasters. The hurricanes of 2005 didn't result in insolvencies, and the industry realized an underwriting profit in 2005. We would argue for a system that allows the private market to fully exhaust its own risk-transfer resources before government resources would be brought to bear. We don't think the government should do what the private sector can do.

Q. With the Dec. 31, 2007, expiration of the Terrorism Risk Insurance Extension Act looming, the NAIC is working on a plan to submit to the U.S. Treasury Department for consideration by the U.S. Congress. Can reinsurers handle the risk?

A. Some of our members write terrorism risk, and there are others that don't really write that much. It's not a risk that all want to reinsure. It's pretty clear that there is a greater demand for terrorism risk coverage than can be met by the market. As with our position on the natural catastrophe plan, in designing a TRIA alternative, existing private-sector resources should be exhausted before the government steps in.

Q. One of the key items on the NAIC agenda this year is collateralization for nonadmitted reinsurers. How does this affect your members?

A. Many Bermuda reinsurers have created U.S. subsidiaries, which are admitted in the U.S. and don't post collateral. Our members also do business on a cross-border basis and post collateral. Collateral is not an impediment to doing business in the U.S. Our membership would say that the status quo is what it is and the market works. If the NAIC decides to change the rules, we want to work with the NAIC on that process and make sure the new rules are equitable. Unless the ceding insurers say they want change, we're agnostic about change.

Q. How has the Bermuda market responded to catastrophes over the years? Can it withstand more rough weather that might come in the hurricane season ahead?

A. We certainly do have a track record here where four times in the last 20 years large U.S. events have caused an inflow of capital. That led to the formation of new companies and created the world's foremost center of reinsurance expertise. Will it continue to happen? Certainly some consolidation seems inevitable, but just follow the rules of supply and demand. If there's a demand, the supply will follow.

(By Eleanor Barrett, senior associate editor, BestWeek: eleanor.barrett@ambest.com) BN-NJ-04-10-2006 0925 ET #

Copyright © 2006 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. Reprinted with permission.