In light of the turmoil in the Western economies, Jonathan Parry asks whether diversification can really be seen as an indicator of strength.

The security and reliability of insurance and reinsurance partners is becoming more important in these uncertain times. But making an informed call in a fast moving and challenging market environment is far from simple.

In recent years increasing emphasis has been placed on rating agency financial strength ratings.

But these are just one tool for assessing the strength or otherwise of insurers and reinsurers – hence the continuing importance of counter party credit assessment processes such as broker and cedant security committees. The additional strength that diversification can bring to the balance sheets of underwriting entities is also becoming more important. But how reliable an indicator is this?

“Diversification has often been followed by a loss-driven return to core business.

It is no secret that the recent focus on diversification has been driven, in part, by the need to respond tactically to a number of soft market issues. Equally, it is also no secret that insurance and reinsurance sector diversification has, for many, often been followed by a loss-driven return to core business.

Yet some insurers and reinsurers have successfully built highly-diversified businesses. What is it that marks them out? More often than not, it is a long-term strategy, rather than a tactical response to market pressures. They see the true value of diversification as going beyond efficient use of capital or spread of exposure – valuable though those benefits are – and steadily develop their business bases over time. Expansion is driven by the ability to acquire the right, bottom line-focused underwriting talent, rather than solely rating dynamics. In short, being a diversified risk carrier is their core business proposition and is firmly centred around their clients’ need for innovative, tailored insurance solutions.

Jonathan Parry is managing director of QBE Re Europe