The fallout of subprime will be felt more keenly in today's global village than ever before
If your office feels somewhat empty in March it's probably because many of your colleagues are in the Middle East for MultaQa Qatar and the World Insurance Forum in Dubai.
Reinsurance is increasingly a global business. Companies can no longer afford to sit complacently in London, Bermuda, Munich or New York and expect the business to come to them. “You can’t have a head of practice sitting in New York or London and say that is the Middle East office,” is the verdict in our article on page 32. Many of the industry executives attending next month’s conferences will be mulling over this as they marvel at the region’s growth potential.
In the last 12 months, Marsh, AIG, Lloyd’s, Scor, GIC, Flagstone, Lancashire, Liberty, Allianz Re, Axis, JLT, Ace and Hannover Re among others have set up branches or expanded an existing presence in the region. A number have been granted licenses to operate out of the financial centres of Dubai and Qatar while others have established branches or joint ventures in Bahrain and Saudi Arabia.
Standard & Poor’s argues that reinsurers should become “global nomads”, with branches in every market and local people on the ground. “Think global, act local” as the saying goes. The breakneck pace at which the Class of 2005 start-ups have spread into new markets is evidence of the pressure to diversify.
Much of this has been characterised by M&A activity, such as the purchase of Lloyd’s syndicates and US excess and surplus lines insurers. A few have spread their tentacles still wider. In just over two years of operation Flagstone has subsidiaries in Martigny, Switzerland, Halifax, Nova Scotia, Hyderabad, India, London, UK, Dubai, UAE and Puerto Rico. It even has a South African presence. This is surely an incredible achievement by historical standards for a Bermuda start-up?
The pressure to establish a global presence is all well and good but what happens when you are trying to make inroads into a new market amid softening rates and fierce competition? Do you undercut your rivals in order to achieve crucial market share? The rush to gain first-mover advantages in China, Brazil, India and Dubai will only remove that advantage if insurers and reinsurers submit to lowering their prices.
Market representatives might be loathe to admit it but the jurisdictions themselves are also in competition. Dubai is vying with Qatar, Bahrain and Saudi for your business. Just as other domiciles are hoping to win business that would have once flocked to Bermuda. In a recent report, S&P warned Bermuda not to get complacent. “The signs are that Bermuda won’t dominate the industry over the next decade,” it said. “Bermuda will remain important, but insurers are also beating a path to Dublin, Dubai, Zurich, and Luxembourg in a bid to be closer to their customers.”
The common argument is that attracting global expertise to the region will benefit the Middle East as a whole, regardless of whether it is Dubai, Qatar or elsewhere that a firm chooses as its base. In reality these centres are spending a colossal amount of money on marketing efforts to convince you to pick them. This is natural – it’s business – but don’t be fooled into thinking otherwise.
With the Reinsurance Directive now transposed in much of Europe, Dublin (page XX) is growing in popularity. The freedom to “passport” from one Member State to the next means reinsurers can be located in low-tax Dublin or Luxembourg and continue to write business in London. Granted there are other considerations to tax, but it’s a good place to start.
An increasingly global world is both bane and blessing. The fallout of the subprime collapse will be felt more keenly in today’s global village than ever before. XL, Swiss Re and the monoline bond insurers (see page XX) may have taken a direct hit but others will see a dent to their investment returns. And that’s before the D&O claims start flooding in – will it be $3bn or $20bn?
These challenges could prove an opportunity for the run-off sector. “The prospect of lower investment returns does provide further opportunities for the run-off sector,” Catlin COO Paul Jardine told delegates at the ARC Congress in London, warning that less investment income will make it “harder to justify” long-tail business. Art Coleman co-vice chairman at AIRROC put it more bluntly. “A lot of companies are going to be impacted by [subprime] and this will mean new members for ARC and AIRROC,” he predicted.