The recent announcement of the setting up of Starbound Re, a limited-life, special-purpose Class 3 reinsurance company in Bermuda to offer reinsurance to RenaissanceRe through a quota share agreement, warrants one simple question. Where are they going to put it? To say that office space is at a premium in Bermuda is like saying bicycles are a popular means of transport in Beijing.
A look back at the inaugural Global Reinsurance Business Location Guide which was produced in 2002 to provide details of the locations of all major participants in the reinsurance industry in Bermuda, offers a rather simplistic but quite stark picture of just how far the insurance and reinsurance sector has expanded on the island. In 2002, 84 individual companies were listed in the guide under the heading of “re/insurance companies”. Four years later that list has increased by 75% and now includes some 147 companies. Compare this to the figure for the London Market Business Location Guide, which has actually fallen from 71 in 2003 to 68 in 2005 (this figure does not include Lloyd's syndicates) and it is quite telling.
As space is such a premium in Bermuda, I was surprised to read recently James Kent's comments on the Bermuda market in the Willis Re-View, in which he stated that, “Basic principles of supply and demand would suggest that a Class of 2006 may possibly be created to take advantage of the extremely hard US cat market”. Where would they put them?
However, Kent goes on to highlight a range of limiting factors which impose a “ceiling” on just how much Bermuda's infrastructure can be stretched to accommodate new players, citing the drying up of the senior underwriting pool coupled with the restrictions imposed by the number of school places and housing.
But that does not mean to say that we will not see new reinsurers being set up prior to the July renewals. In fact this is already happening, with Tower Group confirming in April that it had entered into a strategic relationship with CastlePoint, a Bermuda-based holding company that it has sponsored, followed by AM Best granting the new operation the “A-” certificate of entry.
But it must be acknowledged that there is a limit to the size of market which Bermuda can comfortably support, and for many of the island's current residents, both new and old, Hamilton seems to have passed the point at which it can be deemed “comfortable”.
Market capacityTo a degree there is also a limit to the amount of catastrophe capacity which Bermuda's reinsurance sector can offer buyers if the sector is still going to be able to achieve rate hikes deemed sufficiently profitable in the forthcoming July renewals. According to Benfield's Bermuda Quarterly, “Shaken and Stirred”, released in March, expectations are that reinsurance capacity come the July renewals and beyond will be relatively tight. The report cites, “The recalibration of catastrophe models, a shrinking risk appetite for peak exposures, restructuring of coverage on a more restrictive and the increased cost of capital are generally expected to exert further sustained upward pressure on pricing.”
But just how limited will the capacity offered by the Bermuda market be and to what extent will the sector be able to impose sufficient pressure on buyers to accept the price push? One of the most common phrases cropping up in reinsurer commentaries, both by new entrants and long-in-the-tooth island stalwarts on the current state of the market and their approach to the forthcoming renewals is that “we are keeping our powder dry to take full advantage of the expected strong rate hikes”. The fear is that with so many storing up their capacity for the perceived July rate bonanza, or setting up sidecars to limit the potential exposure to such volatile lines, this could serve to dampen price hikes.