Rampant merger and acquisition activity, new concepts of risk financing, including the utilisation of capital markets, the fall and rise of Lloyd's, the re-invention of Bermuda, privatisation in emerging economies, e-commerce - nobody could accuse the 1990s of being dull.
Global Reinsurance has been there all the way, since the launch of its first issue in September 1990. Our aim has always been to keep abreast of the changes taking place in this dynamic market; a challenging and stimulating exercise.
The 1990s didn't start off too well, particularly for the London market. Heavy losses were leaving their indelible mark on all commercial lines - jobs were lost, and businesses and reputations suffered. To this day, Piper Alpha, Lockerbie, and Hurricanes Hugo and Andrew still have resonance.
As a contact pointed out to me at the time, with the LMX market blowing up the way it did, many players were left wondering if Lloyd's and the London market would emerge from the debacle alive.
They did, of course, and how. Lloyd's brought in David Rowland and never looked back. The Reconstruction & Renewal plan has proved extremely successful, leaving a near clean slate to continue underwriting. The London market conceded quite a few casualties, and suddenly understood that small was not necessarily beautiful (in 1990 many leading underwriters had capital of less than $50 million). Consolidation followed and the market hasn't been the same since.In October 1993, after a fiery hitch, the London Underwriting Centre (LUC) opened for business, conceived as the main trading centre for the London company market which it has since proved to be. Just recently, LIRMA and the ILU combined their resources to form the International Underwriting Association of London (IUA). Traditional rivals, Lloyd's and the London company market are now working together. They recently announced a top level forum to streamline processes in London; a significant step towards a more cohesive market and an unprecedented level of co-operation.
The market has also shown its commitment to e-commerce by supporting the creation of Worldwide Insurance e-commerce (WISe), formed from LIMNET, RINET and WIN.
Good moves, but the general consensus is that London still has much to do if it expects to lead in the twenty first century.
Some cynics might say, why bother? Globalisation and that 1990s phenomenon, the internet surely render the concept of a trading centre defunct. Not so. As ever, (re)insurance just isn't that simple. There is always an advantage to be had in physical market buildings where the market movers, from underwriters and brokers to professional advisors, can meet up and thrash out increasingly complicated deals. Handshakes and eye contact say more than e-mail correspondence could ever dream of.
The trials and tribulations of London aside, the 1990s have witnessed plenty of change in the industry at large - brokers, underwriters and their corporate customers. The process of consolidation has left few untouched, to the extent that those conference nametags are now terribly useful for putting surnames to a company. In the (re)insurance sector, small is out and big is in, with greater critical mass proving a must in the face of dramatically reduced margins. That isn't all there is to it, of course. Other forces have also been at work. In the cutthroat market of recent years, mergers and acquisitions have become a convenient substitute for organic growth. In addition, some argue that with non-life stocks out of favour, directors have found themselves under tremendous pressure to achieve shareholder value by either clipping their capital bases through share buy-backs or taking the merger and acquisition route.
Whatever the reasons, the statistics speak for themselves. In 1990, the five largest reinsurers were believed to control 21% of the world non-life market estimated at $90 billion a year, and by the end of 1998 the five largest controlled 38% of a market estimated at $125 billion a year. The top 12 reinsurers write about 60% of global reinsurance premium.
The big question is whether this process will continue into the next millennium. Some say the forces driving most of the consolidation have largely given way to a period of assimilation of those tactical actions while others contend that, if anything, the process is gathering steam. Fact is, consolidation is set to continue (at what rate is anybody's guess), particularly in the international arena and the major focus will be among mid-sized and smaller companies. Among the larger companies there will be a limit to consolidation because while insurers want strong reinsurers, they also want choice. As long as soft markets persist (only retro business is showing signs of hardening), critical mass is, well, critical. With multi-line, multi-year policies proving increasingly popular, the market is unlikely to turn, to use an old-fashioned term, for some time to come. Which brings us to another 1990s phenomenon - alternative risk transfer, better known as ART. Sophisticated clients are demanding integrated risk management solutions to increasingly complex problems. To satisfy this demand, today's reinsurers must be able to provide a full line of alternative risk products and services in addition to their traditional offerings. “Alternative” is misleading since ART products are complementing the traditional market, not replacing it. There is also no precise definition of ART, in keeping with a mould-breaking, innovative sector. Some regard it as merely moving non-financial risks into the financial markets, cat bonds being an example, while others cite a whole host of products.While the uptake of ART techniques is still relatively modest, there is little doubt that they continue to find favour and the scope of such business is set to increase.
The original “alternative”, the captive market, has shown no signs of letting up over the last decade. So much for the old theory that captives only prosper in a hard market. The captive concept has spread across Europe, Australasia, the Far East and South America, fuelled by a number of factors, including privatisation and a more integrated and strategic approach to risk management. Although the tax authorities have largely hardened their attitude towards the use of captives, the increasing number of new formations suggests the days of the captive are far from over.
Bermuda first came to the financial world's attention as a captive centre, of course. The rest, as they say, is history. ACE and XL first set up base there in the mid 1980s, filling a gap in US high level liability coverage. Hurricane Andrew, whose devastating $18 billion in insured losses in 1992 resulted in shortages and high costs of traditional catastrophe reinsurance, exposed the need for greater capacity. With the establishment of eight property catastrophe reinsurers between 1992 and 1993, Bermuda suddenly became a major contender in this sector. There was more to come. The Bermuda market has since broadened and deepened into a leading (re)insurance centre and is now the R&D powerhouse of the insurance industry.
Consolidation has made its mark, of course, with some big name, big bucks deals in recent years. For example, PartnerRe, which began life as a monoline catastrophe reinsurer, was one of the last Bermudian cat companies to diversify when it acquired France's SAFR in 1997. Of particular interest has been Bermuda's emergence in the Lloyd's market, following the introduction of corporate capital. ACE, XL Capital (previously XL) and Terra Nova (which Virginia based specialty insurer, Markel Corp. recently agreed to acquire) are now major investors in Lloyd's. ACE alone controls at least 10% of Lloyd's capacity.Back in the early 1990s few would have believed this possible. I remember well asking leading London players about the sudden emergence of catastrophe capacity in Bermuda, the new kids on the block, so to speak. The general consensus was that such organisations were for the block eventually. I believe the favourite phrase was “flash in the pan.” How wrong they were. It's been quite a decade in so many ways.
Valerie Denney is co-editor of Global Reinsurance.