Ten years ago there were more than 50 reinsurers in Scandinavia. Of the handful that remain just three - Copenhagen Re, Folksam and Sirius - write international business. Leif Corinth-Hansen describes how Copenhagen Re bucked the trend in what, even by the standards of the industry, has been a turbulent market.

Copenhagen Re is now one of the most profitable reinsurance companies in the world relative to its size. However, we would have been forced to leave the market had we not fundamentally changed our business philosophy in the early 1990s, in response to dramatic changes in the market.

With the knowledge that we have today, we were technically insolvent for a while during the 1980s; we were also far too small by today's standards. It took a change of direction, supported by a series of capital injections, to get us to our present position of steady and profitable growth.

The 1970s and 1980s saw tremendous activity within the industry generally, and especially in Scandinavia. Unfortunately, much of the growth witnessed then was based on naive optimism rather than a sound understanding of reinsurance principles. Most insurance companies in the region saw reinsurance as a natural area for diversification, regardless of whether they had the expertise or capital to sustain it.

The result was, even at the time, fairly predictable. As more companies entered the fray, rates started to fall, a process encouraged by consolidation and therefore increased retentions among primary insurers in Scandinavia. When the inevitable upturn in losses came, there were some terrible underwriting results - and a series of withdrawals from the market.

Our story

We do not pretend that we escaped unscathed from this difficult period, even though we were protected to some extent by our specialist knowledge of reinsurance and diversified portfolio. In the 1970s, we had greatly expanded our international business, partly in response to worsening conditions in Scandinavia, which had previously accounted for the bulk of our turnover. We were one of the first mainland European reinsurers to have a physical presence in the London and Singapore markets. W also opened a subsidiary in Australia, and an office in Chile.

Like many other international reinsurers in the late 1980s and early 1990s, however, we were dogged by the problems of US asbestosis and pollution exposures. We faced losses on natural catastrophes such as the European storms, Hurricane Andrew and Typhoon Mireille in Japan. We were hit by a re-emergence of losses in our financial guarantee business.

Our low point came in 1992 when we gave our shareholders a negative return on their funds of 25%, a situation that forced us to reassess every aspect of our business. The outcome can be summarised as follows:

* the imposition of strict underwriting controls;

* greatly increased capital and improved reserving levels;

* the development of new markets, especially in emerging economies;

* the continuous reassessment of our activities and structures.

The changes to our underwriting systems implemented in the early 1990s were dictated largely by a desire to play to our strengths and avoid those areas of business where our lack of size placed us at a disadvantage. We no longer write financial guarantee business, nor do we become involved in US liability, because we regard the American legal system as too unpredictable.

We now write mainly short-term reinsurance; long-tail business is restricted to no more than 5% of the total. Reflecting this new approach, certain US and long-term lines have been put into run-off, but with provisions considerably above industry norms. We are far more conservative, both in the business we write and the reserving levels we apply, which are rigorous by anyone's standards.


At the same time, we recognised that our capital base needed to increase dramatically to give us an adequate platform. However, Copenhagen Re does not accept the view that only big is beautiful, which is one reason why we have consistently turned down approaches from other companies wishing to merge with us or take us over.

Being relatively small has advantages. It helps you to be flexible and enables decisions to be taken rapidly. To quote Jacob Schlanger of Standard & Poor's: "Big players lumber, and when that happens there is opportunity for others."

Smaller companies find sensible underwriting easier, even in soft markets, because they are not involved in a global battle for ascendancy. Profit, not market share, is always our watchword. And we also find that brokers and customers alike appreciate the diversity and innovation that we bring to the market.

Nonetheless, we did acknowledge that the minimum size needed to be credible had increased, and that we had to catch up. Between 1993 and 1997 our shareholders' equity (including equalisation reserves) increased by 150%, from nearly DKK 800 million to nearly DKK 2.0 billion ($290 million). This growth - which enabled us to achieve ratios considerably better than the industry average - was achieved largely through the reinvestment of profits. An important contribution, however, was also made by our parent company, Alm Brand, following a rights issue in 1996.

This show of commitment, together with greatly improved results, were among the factors that enabled us to achieve an "A" rating from both A.M. Best and Standard and Poor's last year. This upgrading both reflected and underpinned the improvements we had made. In particular our recent underwriting results have been among the best in the business, with an average combined ratio over the past four years of just 91%. This, in turn, means we do not have to gamble on the stock market to ensure adequate returns for our shareholders.

Looking ahead

After these achievements, it would have been tempting to have rested on our laurels. If there is one lesson to be learned from the past 10 years it is that anyone who stands still in our industry is soon left behind. Our next major target is to become a top 50 reinsurer within four years, while continuing to achieve a return on shareholders' funds of at least money market interest rate plus 8% before tax.

With this in mind, we are now in the process of restructuring our group so that our former subsidiaries - in London, Singapore and Australia - become branches. This will enable a more efficient use of capital, and ensure that all our operations act as part of a single global entity, rather than as separate, semi-independent units.

We are developing new areas of specialist underwriting expertise. We have, for example, taken on Stephen Coward, one the London market's leading engineering underwriters, to write a global account. In Copenhagen, we have revived and expanded our life and health account, and in Singapore we have further strengthened our underwriting team. We are also planning to open an office in Brazil.

Some people are surprised that we have chosen to expand in this manner when rates are so depressed. However, this strategy of writing more types of business makes it easier to maintain premium levels without chasing the market down. Even more important, it leaves us well positioned to take advantage when rates harden, as they inevitably will. We are investing in the future, in the knowledge that a reinsurance company can only be as good as its underwriters; and we are acquiring the technology that ensures our underwriters will have the systems and IT support they need to provide a competitive service.

As for Scandinavia as a centre for reinsurance, head office location is of diminishing importance as our portfolio becomes more global and diverse, with the Nordic countries now accounting for less than 10% of our premium income. Wherever an international underwriter is based, he has to be proactive, and willing to travel to clients and brokers. Conversely, at the same time, routine functions are being conducted through electronic commerce, creating the start of a "virtual" global market, again making location less critical.

The last 10 years have witnessed a breathtaking pace of change - at Copenhagen Re, in Scandinavia and in the reinsurance industry at large - and we are now in a period that borders on constant revolution. The lesson from our experience is that success in this environment will come to those who are willing to respond in a positive fashion, while retaining the core underwriting and managerial expertise that remains the single most important constant factor in any profitable reinsurer.

Leif Corinth-Hansen has been with Copenhagen Re since 1989 and became ceo in 1992.