Franklin W. Nutter surveys the major trends which are redefining reinsurance.
Today's reinsurers find the future racing to meet them before the past is fully behind. As the new millennium approaches, reinsurers are focused on acclimatizing to strategic moves made over recent years. A plateau has been reached as the inevitable forces shaping the industry take their toll on some, while others seek to reshape their own destinies.
A period of dramatic change is naturally followed by a period of adjustment, our present plateau, as reinsurers digest the strategic moves and fine tune them in accordance with their own strategic plans.
The era of consolidation which had such a dramatic effect on reinsurers in the early to mid-1990s appears to have reached a point where most major acquisitions or mergers have likely taken place. The forces driving much of this consolidation - the desire for geographical diversification, increasing a foreign market presence, diversification into life or accident and health, or even merger to increase market position - have largely given way to a period of assimilation of those tactical actions.
Consolidation notwithstanding, the strength of the industry's capitalization as a whole remains relatively unchanged and continues to be robust. The by-product, however, is a very competitive marketplace fuelled by the highest capital positions ever seen in the industry.
Most of the strategic moves are driven by several notable trends which continue to shape the direction companies will take. Prominent among these is the acceleration of the convergence of financial services in the United States and throughout Western Europe.
Although legislation to facilitate the convergence of corporate entities between banks, securities, and insurance has not yet been enacted by the US Congress, reinsurers have made significant commitments to a blended and holistic financial approach to clients.
While the insurance industry itself has yet to fully embrace consumer-level convergence of financial products, reinsurers - driven by choice and competitive forces in the marketplace - are blurring the lines between insurance, investment banking, and capital markets products.
As reinsurers continue to look beyond traditional insurance company clients to alternative risk transfer vehicles and corporate clients directly, this trend will continue to grow, with risk managers becoming more sophisticated and seeking holistic approaches to their risk financing needs. In the intermediate term, sophisticated insurance and reinsurance buyers will define reinsurance markets.
A second major trend among reinsurers has been the ongoing expansion of globalization. For many years, most reinsurers have been international in character. The consolidation among reinsurers in the US and among Europeans, however, has broadened the global perspective. Far Eastern, South American, and Eastern European countries are now markets for most reinsurers. As these emerging economies continue to grow, reinsurers will be major players in advancing the security needed for financial growth.
Electronic commerce is another important trend affecting reinsurers. The emergence of the internet as a vehicle for conducting business and communicating has been widely documented. While the public media focuses on consumer level electronic commerce, reinsurers are concentrating on the efficiencies associated with business-to-business electronic commerce and improvements in backroom operations. Although ceding companies have been slow in adopting e-commerce, vendors of technology have begun to shape the networking among commercial traders. Reinsurers have been on the cutting edge of promoting the value of EDI, electronic commerce, and the internet in improving business practices. E-commerce is viewed as a major component of reinsurer growth and a means to improve competitiveness. In the future, operational efficiency will be an overriding credo as a business practice for reinsurers. E-commerce and the internet will play a leading role in achieving the goal of reducing costs and improving efficiency.
The last significant trend for reinsurers is the emergence of multi-line growth for some major reinsurers. While the insurance industry has largely remained singularly focused on property/casualty insurance, a number of notable - traditionally property/casualty - reinsurers have expanded into life reinsurance and accident and health reinsurance. The desire on the part of management to apply the extraordinary capital base to financial services and products compatible with the expertise of their staff no doubt drives - in part - this expansion.
In conclusion, it must be said that the “past” remains with us. The redefinition of reinsurance and reinsurers continues from this plateau, largely defined in the mid-1990s, as the industry consolidated. However, the “future” reinsurer is likely to be multi-disciplinary in its expertise, provide a diverse offering of financial options for clients, and regard its client base with a much broader perspective. The plateau is not a resting ground, but rather a jumping off point as reinsurers are challenged by external trends and seek to shape their destiny by repositioning themselves vis-a-vis their competitors.
Franklin W. Nutter is president of the Reinsurance Association of America.