Canadian Underwriter

Reinsurance market innovations: Staying Alive

July 1, 2000   by Glenn McGillivray, head of corporate communication at Swiss Rein

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Nineteenth century journalist John Beauchamp Jones, commenting on members of the “noble profession,” once wrote, “I think that to be consistent as a politician is to change with the circumstances of the case…Statesmen are the physicians of the public weal, and what doctor hesitates to vary his remedies with the new phases of the disease”. The same can be said for businesses. A company’s refusal to rework or rewrite its strategy as market patterns dictate will undoubtedly effect its own demise.

Reinsurers are no different. But what exactly are participants in this segment doing, not just to ride out the ultra-soft, ultra-competitive market of recent years, but to emerge with stronger bottom lines, satisfied shareholders and strong outlooks for the future? Losses from natural catastrophes and manmade disasters cost the global insurance industry US$28.6 billion in 1999, with natural catastrophes accounting for US$24.4 billion. The year was the second most expensive ever, after 1992 (the year of Hurricane Andrew) and marked the worst year on record for frequency.

The high loss burden was primarily due to seven individual billion-dollar losses. Eleventh-hour winter storms in Europe also proved to be very costly, with one levying insured damages on the order of US$4.5 billion. The year illustrated perfectly the volatility of the property and casualty insurance business, which makes it very difficult for non-life carriers to plan the future with any degree of certainty. Take the European winter storms Lothar and Martin for example. The pair came on December 25/27, and 27/28. Just as European carriers thought the year was over — they got hit with a massive one/two punch, which not only ravaged France, Germany, Switzerland, Spain and parts of the UK, but also did the same to many profit and loss statements.

Reinsurers heavily concentrated in property cat business were hit hard by the events of 1999: earthquakes in Turkey, Taiwan and Greece; Hurricane Floyd in the North Atlantic; tornadoes in the U.S.; a major hailstorm in Sydney; and landslides in Venezuela, were just some of the other occurrences which forced many carriers to break out the red ink.

However, several of the world’s major reinsurers still managed to climb out of 1999 with sizeable growth rates — on both the top and bottom-lines. The countermeasure for many of them took the form of diversification into life and health (L&H) lines of business. In 1998, the year in which the most recent figures are available, insurance companies wrote US$2.155 trillion in premiums worldwide. About US$891 billion of that was p&c while a whopping US$1.264 trillion was generated from L&H. The total figure represents an increase of 2.3%, in real terms (i.e. after inflation) over the prior year. The increase came entirely from L&H, non-life business retracted by 0.1% cent over the same period. Over the previous ten year period, life business worldwide has grown on average 5% each year.

L&H is not nearly as volatile as p&c business, and allows companies that write it to be able to better plan. Futhermore, right now organic growth in L&H business is considerably more healthy than in non-life. This, as populations get older (and in many cases wealthier), governments liberalize or privatize pension, social insurance and public health schemes, and new markets open up worldwide. Along with growing the top line, expansion into L&H allows reinsurers to funnel more capital into investment portfolios. When managed properly, investments can add substantially to bottom lines.

Entry into emerging markets

A number of emerging markets worldwide are currently offering significant organic rates of expansion — in both L&H and p&c segments. In some cases, these rising markets are producing double-digit rates of premium growth — in real terms.

In 1998, premium volume in Latin America increased by 7.2% over 1997. Non-life premiums increased by almost 5% with the main growth drivers being the two important markets Argentina and Mexico (+8.7% and +7.8% respectively). The Brazilian market will offer great potential to the company that wins the bidding when the state-run reinsurance monopoly IRB is auctioned off in late July. Four companies — Munich Re, Swiss Re, Transatlantic Re and Brazilian bank Opportunity (with Latin American Re as a partner) — have qualified for the bidding. Analysts have said that once the market is completely deregulated, its potential value will range anywhere from US$800 million to US$2 billion.

The insurance markets in Central and Eastern Europe witnessed differing fates in 1998, with the overall Eastern European non-life market posting a clear decline of 4.5%. However, only two countries effectively experienced a fall in business, namely Russia (-19%) and Bulgaria (-32%). Most countries in the region witnessed economic growth of between 2% and 5%, prompting demand for non-life insurance: Poland, Slovakia and the Ukraine, for instance, managed over 10% growth.

China, Taiwan and the Indian subcontinent remained unaffected by the 1998 economic crisis. In fact the insurance industry in these countries continued to benefit from powerful economic growth. Premium income in 1998 rose both in life insurance (between 9.1% and 26.5%) and in p&c (between 3.4% and 19%).

It was reported June 7, 2000 that eight European insurance companies have thrown their hats into the ring for business licenses in China. Under the trade agreement negotiated between the European Union and Beijing in May, seven additional life and non-life licenses will be granted to European insurers, after China enters the World Trade Organization (WTO).

Embracing new distribution channels

As the market downturn dragged on, and started to really be felt on reinsurers’ bottom lines, old paradigms began to crumble. Companies started to look at ways to grow the book organically. For some direct writers, this meant looking to the brokered segment.

General Electric, owner of Employers Re, surprised some when it announced on July 31, 1998 that it was buying Kemper Re from Kemper Insurance. Kemper Re and another GE Capital subsidiary, First Excess and Reinsurance Company, were combined into a single entity incorporated as GE Re. The move gave GE a significant position in the U.S. broker reinsurance segment.

In November of that year, direct writer General Re announced plans to acquire Lloyd’s agency DP Mann Holdings Ltd. DP Mann manages Syndicate 435, the fifth-largest syndicate at Lloyd’s insurance market, via its managing agency DP Mann Ltd.

On December 2, 1999 Swiss Re announced the acquisition of Calabasas, California-based Underwriters Re. The deal closed on May 10. The acquisition marked a shift in Swiss Re’s strategy as it established the group as a leading participant in the broker channel reinsurance market in the U.S.

Lloyd’s of London has also gotten into the act by expanding its broker network. The venerable London market said on May 25 that it would open itself up to brokers based outside London starting next year. The changes are partly in response to competitive pressures that have seen Lloyd’s lose business to overseas insurers and new markets such as Bermuda.

French reinsurer Sorema said June 6 of this year that it is launching a new syndicate at Lloyd’s on July 1, marking a return to the London market. The moves adds Sorema to a long list of reinsurers that have, over the last couple of years, looked to Lloyd’s to expand product offerings and access new markets. Others that have done the same include Copenhagen Re, Swiss Re, Gerling Re, Munich Re and General Re.

Re-programming for program business

Program underwriting, says A.M. Best, is one of the few business strategies offering strong premium growth potential for p&c insurers in today’s market. Best’s defines program underwriting as “a form of alternative risk transfer that brings together commercial and personal insureds and agents representing large blocks of premium volume”.

Seeing the potential in program underwriting, several reinsurers (including American Re, Employers Re, Underwriters Re and Zurich
Re North America) have formed subsidiaries to deal directly with MGAs writing this type of business. These “reverse-flow” writers act as primary insurers for their reinsurer parent companies. At least one reinsurer acquired a program writer with an eye to boosting its top and bottom-lines. German reinsurer Hannover Re announced in August 1998 that it was paying US$500 million to buy U.S. Clarendon Insurance Group, a leader in the U.S. program segment.

Going non-traditional

For reinsurers, developments in securitization and other non-traditional avenues plus the foray of investment banks into the reinsurance business means that insureds may now pick and choose between insurers, reinsurers or other providers to service their needs. In order to meet these challenges head-on (and preserve marketshare) a number of reinsurers have formed business units to serve the growing “non-traditional” needs of the industry.

In July 1997, Swiss Re launched its Swiss Re New Markets division. The unit combined Swiss Re Group’s expertise in alternative risk transfer and risk financing;

In October 1997, Employers Re announced the formation of its own financial market products group. The new group was created to provide customers with income statement and balance sheet protection as well as some risk securitization products;

In July 1998, American Re announced the formation of American Re Capital Markets, Inc., through which it would provide integrated solutions for mitigating risk in the financial markets;

Gerling Global Financial Products (GGFP) was launched by the Gerling Group in 1997 as the worldwide center for developing and marketing alternative risk transfer products including finite (re)insurance and capital market products.

With “adding value” as the catch-phrase, many reinsurers have also developed ancillary offerings or have purchased operations which can provide clients with a wider range of services, in order to further cement the reinsurer/client relationship. Among some of these additional offerings include earthquake and cat modeling, dynamic capital adequacy testing, asset and asset/liability management services, and venture capital for insurance start-ups.


The need to embrace e-commerce is probably the best example of businesses’ need to rework their strategies in light of changing market forces.

A handful of reinsurers, including GeneralCologne Re (i.e. the rebranded General Re), Employers Re, Zurich Re, American Re and Swiss Re America Corp., have web-based facilities which allow primary underwriters to enter facultative submissions. Currently, it appears that only one reinsurer is offering treaty capacity on the Internet. On November 18, 1999, Swiss Re began to auction limited CatXL capacity for earthquake in Israel, windstorm in Great Britain, France, Belgium and the Netherlands, and marine covers anywhere in Europe. Since the beginning of January, Swiss Re’s ELRiX (Electronic Risk Exchange) has also been quoting general (private) aviation risks online. And on May 26, Swiss Re also began selling weather derivatives online via the ELRiX platform.

Certain Lloyd’s syndicates have developed TLO Online, a site which enables marine hull insurers to purchase total loss only reinsurance via the Internet. The facility allows prospects to obtain a quote, bind coverage, manage their billing and file claims all via the site. At least one reinsurer, Zurich Re, offers a claims database which allows a cedent or broker to check the status of claims payments.

Move it or lose it

For the world’s reinsurers, market conditions of recent years have been nothing to take lightly. Some carriers have been under so much pressure that they exited from those segments that were turning in consistently sour results. In 1999, Employers Re and St. Paul Re both announced their exit from the fac property market.

Several providers have had such a hard time of it, they had to be wound-up altogether. Consider the Australian market, where three reinsurers were recently closed down due to massive losses (New Cap Re, GIO Re and Reinsurance Australia Corporation). Liberty Re, too, ceased operations on January 6, 1999 in what was called “a bleak indication of the state of the London reinsurance market.” Clearly, navigating the market minefield of recent years has been a case of “do or die.”

In the early 1980s, after Lee Iococca helped pull Chrysler Corp. from the brink of disaster, the chairman was heard on television commercials counseling others to “Lead, follow, or get out of the way.” For reinsurers in today’s cut-throat business environment, the second and third alternatives basically amount to the same thing.

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