AM Best: ABIR President: Domiciles With Border Restrictions Hamper Spread of Risk
July 11, 2016
View the video version of this interview here.
ABIR President: Domiciles With Border Restrictions Hamper Spread of Risk
NEW YORK – Bradley Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers, warned 24 global jurisdictions that have limited their insurers’ abilities to reinsure outside their borders are impeding the ability to spread risk. He spoke with A.M. BestTV at the New York Stock Exchange for the New York Recovery and Resilience Leadership Forum.
Following is an edited transcript of the interview.
Q: What can we learn about resiliency from Bermuda?
A: There are five points to think about in terms of hurricane resilience with Bermuda. One is risk awareness. Bermuda is hit by a hurricane every three years, a bad hurricane every 10 years.
That leads to a culture of storm preparation. Every Bermudan knows when the weather forecast comes out what they need to do to protect their families, what they need to do to protect their property.
That’s historically led to very strong building codes. Bermuda has the best building codes in the world, the strongest buildings. When the storm comes people shelter in place. There’s no need to go to an external place. People understand their house is the safest place to be.
In addition, point four is that’s all led to a great degree of insurance penetration. Everyone is insured in Bermuda. Everyone is insured because they know that there’s a real risk of damage and yet they know that their houses are built strongly. The insurance reflects the benefit of those strong building codes.
Fifth is once the event has occurred, the storm has occurred, there’s a real community spirit, a real community engagement. People know they have to help their neighbor, whether that’s to help remove the tree limbs, clear the road for emergency vehicles, bring food or water to a neighbor that needs it.
There’s a real culture of engagement and recovery, which means following a Category 3 hurricane, within days business is back to normal.
Q: How does regulation affect catastrophe management?
A: The Bermuda Model on Catastrophe Reinsurance, where Bermuda is the leading expert in catastrophe risk management around the world, is one in which we know the science of underwriting catastrophes. We use all the catastrophe modeling. We update our risk profiles on a regular basis based on new policies, new reinsurance contracts issued and then we pool that risk on a global basis.
We’re writing U.S. earthquake. We can write U.S. earthquake at a better price if we’re mixing with that New Zealand earthquake, Chilean earthquake and Japanese earthquake. We can write U.S. hurricane because we’re pooling with that Japanese typhoon, Australian cyclone and European windstorm.
The model then means in the same capital base we have a diversified group of risks. You have premium coming in in a way that none of the risk is correlated and we get a diversification credit which allows us to write coverage at a better price than we otherwise would do.
As long as reinsurers are allowed to pool risk globally the system works. If there’s regulatory protectionism or regulatory ring-fencing, that impedes the ability to spread risk. This can happen through regulation or tax policy. There are 24 jurisdictions around the world that have been identified as having a degree of reinsurance regulatory protectionism.
If that leads to ring-fencing where the capital to support this risk has to be in the jurisdiction and there can’t be a spreading of risk outside the jurisdiction, that upsets the business model. That means less coverage can be sold and the coverage that is sold is at a higher price.
That defeats the purpose of governments. That defeats the purpose of consumers in terms of having readily available insurance to protect themselves and their families.
View this and other interviews at http://www.ambest.tv
(By Kate Smith, senior associate editor, Best’s Review: Kate.Smith@ambest.com)