Albin F. Reichmuth looks back on a career which has witnessed turbulent times for the reinsurance industry.
A retrospective view after more than 35 years in reinsurance, just a few months before the millennium with all the concerns over the millennium bug, seems to contain little attraction. In fact, it sounds like a joke that during the introduction phase of a new EDP system in the early seventies where I was busy with analytic and programming jobs, a team member was seriously concerned that the application in place might generate some problems at the overstep of the year 2000 brink. Today we all know that computer systems of that generation were replaced a long time ago as have its substitutes many times since. Nonetheless, I am tempted to argue that an event - if ever - laying at a known date ahead and in addition not being an insurable risk by its nature, due to the lack of fortuitousness and estimableness, is of lesser excitement than looking at ups and downs and particularities of an industry during a couple of its most turbulent phases ever.My reinsurance experience began in the early sixties, which I still recall as the good old days, not knowing then that those days were probably just over.
However, a second decade of booming economies after World War II had taken off and all the signs looked favourable. Most of the markets were still sound, if not to say, very sound. Sporadically though, loss events had to be recorded for which type and size had not been observed before. That decade had been literally rung in by the Lutine Bell following the sinking of the Andrea Doria, a top class Italian cruise ship. There were some large industrial fire losses plus a series of old Swiss mountain hotel fires, the latter reinsured to a large extent in the London market and it was not for no reason that a London business newspaper ran a cartoon of a burning Swiss hotel with its owner standing merrily aside, proclaiming that the season was over. Aviation underwriters had to register a couple of fatalities, mainly emanating from the Middle East, although in view of the then maintained level of premium rates, they only experienced light turbulence. Despite the unanticipated loss figures, the industry was not in an unhappy situation in general and, apart from the weather, the loss scenarios mentioned were the topics emphasised since discussions about rates, terms and capacity contained little entertainment value.
During that time reinsurers showed increased interest in US business when they were abruptly taught by claims advisers on hurricane “Betsy” that the US market could not only produce big amounts of premiums but the same amount of losses. By and large, the 1960 decade drew to its close without any further extraordinary events; business was (good) as usual, Swiss Re sold (I repeat: sold) Mercantile & General and Royal Exchange took over Guardian, not the other way round - a couple of not important but also not unimportant things, just to keep business life a bit more exciting.
The good mood accompanying the ending 1960 decade continued gently into the 1970 one. More and more direct insurance companies were attracted by, as it seemed, “easy” money in reinsurance and many of them decided to endeavour themselves for a piece of that cake, some through a specific reinsurance department, others through a separately formed reinsurance company. Diminishing quality of London brokers' services, as well as a political uncertainty in the UK (fears of nationalising the industry) favoured these moves with emphasis on the continent. Decisions of that type do not usually ripen overnight and it became apparent to some of the newcomers that the newly created overcapacity had pushed down premium rates and softened terms and conditions rapidly. In order to still catch a piece of the mentioned cake, business was often written under the device of “as much as we can get” which would help to justify the admin expenses and ultimately the establishment of the company or the department. After a relatively short period the lesson that in reinsurance, money can be easily lost within a short time and that not writing any business at all can be considerably cheaper, was learned. With a smirk I remember the advice of my then boss, a retired Swiss Re man acting as a board member of my then new company, that a reinsurance company should not necessarily prevent an underwriter from travelling to nice and expensive places, but he should be prohibited to write any business there, since the financing of those expenses would represent a small fraction of the such avoided underwriting losses and would definitely not ruin the company, but poor underwriting results would.
No doubt, there were still plenty of good cakes around and ceding companies and reinsurers who had reciprocal business to offer and to deal with, were, of course, far better off. Till the mid-eighties reciprocal business was a key issue. A share of a company's sound, local portfolio was exchanged against a similar piece from many other companies from, if possible, all over the world. In my opinion, and despite the fact that profits were not at an expected level sometimes and the matching of results of the exchanged business was often difficult and time consuming, the interchange of reciprocal business was a cheap means of reinsurance protection and a simple method creating a genuine, free unload of accumulations and a wide spread of catastrophe exposure on both ends. Apparently, the job of a reinsurance manager of a ceding company whose treaty was generating high profits year after year, was not always an easy task, since his boss, usually the general manager of the company, complained that profits given away to reinsurers were too big and corrections were an immediate must. It is with another smirk that I remember the screaming news from a reinsurance manager of an Austrian company at breakfast during the Monte Carlo week, disclosing to present participants in the happiest possible mood that, thank God, his company suffered a huge fire loss the day before - not the most obvious thing that an insurance man shouts for joy about after being aware of a large loss which hits his company and treaty. Anyway, insiders found that this was great fun.
The increasing dominance of premium growth mentality, accentuated volatility of more and more liberalised market sectors and the considerably grown financial power of most of the players, resulted in steadily increased retentions, lesser reinsurance needs and subsequent reinsurance overcapacity with cheap protections available against the assumed cat exposures. Retrocession cover was easily and cheaply found; hence the LMX and spiral business were born.Seen from a retrospective angle, it is amazing how long it took until remedy could touch ground. The reason for this was, no doubt, the spiral effect. Being part of the market and bound in the daily struggles and fights in order to survive with least possible pains, one could hardly believe that after the 1987 UK windstorm, garnished with the stock exchange crash in the same month, the XL market would not react at the then forthcoming renewal. After losses like “Piper Alpha” and “Hugo”, the European windstorms and a few other events, terms had still not improved. I think that only a minority of reinsurers realised, at that date, that nothing else than the spiral phenomena could explain that no cure of rates and terms was yet recognisable in many markets, despite the disastrous losses occurred within a relatively short period of time.
The Japanese renewals 1991 were reflecting the same picture as before: weak rates and overcapacity; those who stuck to principles and withdrew saved a lot of money for their companies in avoiding “Mireille”, hitting Japan that same year. It was a similar picture at 1992 renewals where, strangely enough again, the perception prevailed that there was no harm someone putting his fingers into the plug as long as he had somebody at hand behind him. It is hardly believable that only after another record loss, namely “Andrew”, underwriters (is this the collective name for writers and followers?) noticed that there was suddenly nobody with a ready hand behind, a situation which forced those people to pull out their fingers from the plug quickly. Satisfactorily this meant that the very rare phase of undercapacity had finally just commenced.
It was for the first time in my career as a reinsurance underwriter that I was sitting in the driving seat. Terms and conditions improved at an incredibly sheer scale almost overnight and adjustments in terms were mastered at a finger click. Big or bigger shares were available in full and for sure, not followed by any signing down. Once again, cash flow meant what the expression was created for: an inward flow of cash. Moreover, there were no losses recorded of any extraordinary size; in other words, reinsurance paradise was back. Undoubtedly, the time from 1993 through 1996 was the most pleasant and most profitable one for the reinsurers of my generation, and I am glad to have been fortunate enough to experience that time, which compensated for more than the pains suffered before. Nonetheless, it was very clear to everybody, I think, that this situation could not last for ever and that again, a detrimental move of terms and conditions would appear unavoidable; ultimately swallowed by the markets which, fair enough, follow by and large the rule of supply and demand.
The worrying thing about today's market situation, I trust many of my colleagues will share, is that it shows signs of a savage state and a giving-up of proper customs and habits in terms of business conduct. Sometimes, one could get the impression that today's reinsurance has similarities to a wrestling-ground without any fences, a place where rules have been removed entirely, a sort of catch-as-catch scene of action where one never knows how much is show and how much is sad earnest. One can hardly discover an end of that scenario as long as the financial world sees a capital oversupply of current status. The immediate question is, what destroys the excess of capital? Quite clearly these are: insurance losses and damages to the infrastructure, high interest rates and inflation. Do we want to have all that? Of course not!
Anyway, it is very clear that the big players like to be challenged in this way, because they have a good opportunity to reach the end of this phase in a reinforced position. How far the current scene of action with limited or no rules can develop, the market will tell. If the world insurance community is susceptible to co-exist with just a handful of reinsurers, our professional guild will have to live with it and to accordingly undergo, if necessary, the required adaptation. A high degree of adaptability will very likely be required within most of the daily private or business life anyway. Nowadays, it is no longer difficult to imagine that our money is handled by one of the few giant banks, that our car is one of a couple of brands which survived the various acts of melting and shredders. This could well represent the beginning only of a long list of scenarios we all hate to think about. Notwithstanding the above, I am still convinced that there will always be a chance and room for players who play the game differently, which does not mean with different or no rules. This conviction leads me to the firm belief and statement that my company, together with the group, is in an excellent position to play that game successfully and my best wishes accompany my friends and colleagues who have taken over the rudder from me, for welfare and success.
Albin F. Reichmuth, vice chairman, Trans Re Zurich. After retirement Mr Reichmuth will maintain his links with Trans Re Zurich and the Transatlantic Group as vice chairman of the board of directors.