Chart of the week - How Bermudian CIOs assess potential impact of global warming, 2021

The main high watermark many Bermudian CIOs may be used to is the one on their hedge fund - and enough of them are dedicated alternatives investors, to know a thing or two about how performance fees are calculated.

But recently the Bermuda Monetary Authority asked them to consider another high watermark, given their shared insular position - global warming.

As the exhibit shows, more Bermudian underwriters consider the risk of climate change on their investments to be, for now, a physical one - so, 'real assets' getting blown over, burnt down or deluged - more than a transitional risk - so, all assets potential becoming a general account anachronism.

And where transitional risk exists, for now, its possible impact for the GA is more medium-to-low than high. For now. As Insurance Risk Data's Insurance Investment Outsourcing Opportunities & Performance - Bermuda 2022 report found, that is changing.

The report identified various underwriters installing ESG measures. The measures must still make money for guarantees and shareholders. But one underwriter notes Dutch M&A brought inhouse the significant ESG skills of its target's affiliate.

Another says Lloyd's activities are bringing ESG/net zero to its attention, if not yet to the fore. A chapter dedicated to ESG in the report describes the island's CIOs as 'edging' towards ESG. But a considered approach might, to some practitioners' minds, be better than the crush-for-the-entry evident in some markets, where asset selection might be a secondary consideration to just getting in the door.

As part of investment and underwriting stress-tests for Group 3A and 4 insurers, whose results the Bermuda Monetary Authority published last week, it is clear the regulator understands physical risks, too. Underwriters of mortgage risk were required to shock their mortgage books in two separate tests, while investors in mortgage-backed securities were told to model and increase in default rates to between 5.5% and 9.5%, plus a 40% annual constant prepayment rate. These scenarios produced mean/median post-stress capital and surpluses of between 86.1% and 89.3%, and 95.4% to 98.4%, respectively. The BMA's other investment stress tests, from inflation to equity falls, credit spreads and debt haircuts, are described here.

Bermudian CIOs gear up, slowly, for climate change

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