A summary of the results of our international reinsurers survey.
In the centre pages of this edition of Global Reinsurance, you will find the replies of 16 leading reinsurers to the most extensive survey of its type which we have ever done. The questions cover areas that we identified as some of the most important current issues facing the people who run reinsurance companies, plus some which are designed to approach those same issues from a less familiar perspective.
We would like to thank very much these people who took the time and trouble to reply so thoughtfully.
Edward J. Noonan, American Re.
Jean-Marie Nessi, AXA Re.
Erich Herrgen, Bayerische Rück.
William J. Adamson, CNA Re.
Alan Howell, Eagle Star Re.
Bernhard C. Fink, ERC Frankona.
Frank Robertson, GIO Insurance Ltd.
Wilhelm Zeller, Hannover Re.
John Engeström, Liberty Re.
Hans-Jürgen Schinzler, Munich Re.
Ronald L. Bornhuetter, NAC Re.
Bruce M. Barone, Overseas Partners Ltd.
Mark D. Mosca, Risk Capital Re.
Jacques Blondeau, SCOR.
James F. Duffy, St Paul Re.
Henry Atzenweiler, Winterthur Re.
We decided to frame our questions in an open way, which we hoped would elicit a range of responses. Here is what we asked and a summary of the replies.
1. Is there a minimum acceptable amount of capital and surplus for a reinsurer today? If so, what level would it be? Can a reinsurer get too large?
Probably the best way to express the current thinking on the minimum capital needed for a reinsurer today is: it depends. It depends, for instance, on the type of business it is writing, the corporate structure, what backing it has from a parent company and how long the company has been in operation. Figures of $100 million to $200 million in shareholders' funds are mentioned more than once, though $500 million is also suggested. Ratings also come into play. "It seems to me that there is more than one answer to this question." (Alan Howell).
At the same time we wondered during this period of consolidation whether there was an optimum maximum size for a reinsurer. The response depended on what was being measured. "In respect of premium volume a reinsurance operation cannot get large enough. . . . In respect of surplus, a reinsurer can indeed get too large." (Wilhelm Zeller).
"A reinsurer can hardly be too large in financial strength terms. There is a point, though, where economies of scale can become diseconomies of scale due to increased bureaucracy and complex hierarchical structures slowing down the decision making process." (John Engeström) But: "In this industry, economies of scale still seem to outweigh diseconomies of size." (Frank Robertson).
2. Are primary companies changing their approach to reinsurance programmes? For example, are you seeing a shift to non-proportional business? Also, to what extent are ceding companies reducing the number of reinsurers on their programmes?
Here there is considerable consensus. The responses confirm a shift toward non-proportional treaties, with allowances for the soft market, and greater retentions for increasingly strong cedants. "We estimate that the market in 2010 will be split with 60% proportional reinsurance and 40% excess of loss, versus today's 75-25 split." (James F. Duffy)
There was also wide agreement that there has been a reduction in the number of reinsurers on cedants' panels. "The big European groups have totally re-visited their reinsurance buying habits. Today they are working with a short panel of reinsurers, probably 12-15 but a maximum of 20, which is very different from the large lists of the past." (Jacques Blondeau). ". . . I would stress the need to save a particularly scarce resource: nowadays the deal-making capacity of a primary insurer's reinsurance director is limited. He just doesn't have time to talk to three to five reinsurers and brokers a day." (Erich Herrgen).
3. How are corporate links between banks and insurance companies affecting reinsurance programmes?
Bancassurance and corporate links between banks and insurers is a fairly well established phenomenon in Europe and considered imminent in the US. What emerged clearly from many of the replies is that reinsurers see banks as largely risk averse. "Although first blush might indicate strong partnerships, banks and insurance companies are almost at opposite ends of the risk spectrum," (Bruce Barone) "Where insurers offer security, bankers demand it." (Erich Herrgen).
There was more than one perspective on the question. "The most interesting change over the last few years is the increasing financial sophistication of the people we deal with at client companies, in part due to affiliation with banks and other financial services institutions." (Ronald L. Bornhuetter). At least one of our panel will be able to say from personal experience: "Having recently merged with Credit Suisse, we are at the moment analysing all the relevant aspects. I will be in a position to give you some first hand input for the Monte Carlo preview in 1999." (Henry Atzenweiler).
4. How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?
Here there is largely agreement on the general direction. As cedants become larger and more sophisticated, they want programmes tailor made for their needs with a more enterprise-wide approach to risk and a blending of reinsurance and financial products. It will be: "A better cake, a smaller cake, but for a reduced number of guests. There will be more risk transfer, less traditional reinsurance." (Jean-Marie Nessi.) The reinsurance market is likely to develop further toward client-specific reinsurances.
". . . We see major corporations seeking expansion of products covering a greater degree of the commercial risks they face, not just the conventional." (Bruce M. Barone).
5. Are you currently using - or evaluating - any form of capital markets product to securitise risk for clients or for yourself? Have you invested in securitised products, such as catastrophe bonds or catastrophe equity puts, issued by other reinsurers? If not, under what circumstances would you do so?
Those companies which have been involved for some time are anxious to report their deals. All believe the distinction between (re)insurance and finance is blurring and that securitised and financial products will play an increasingly important role. "For normal reinsurers to build up huge funds waiting for 'the big one' does not make much sense from an economical and financial standpoint, and I think the financial markets will take over this activity." (Jacques Blondeau). "More complex concepts, known as financial reinsurance, finite covers or blended products do protect more than what was protected in the past, but is it enough? What about asset risks? Isn't the protection of the RoE an ultimate protection?" (Wilhelm Zeller).
There is caution, too. "These new products offer exciting opportunities but are clearly in the developmental stage." (Ronald L. Bornhuetter). "The ART market is still quite immature, and in current conditions seems expensive compared with traditional forms of reinsurance." (Frank Robertson).
Insurers and reinsurers were among the early investors in ART instruments, such as cat bonds. Would you do so? "No. Never, to avoid risk accumulation between assets and liabilities." (Jean-Marie Nessi). "We have for all practical purposes not invested in any catastrophe bonds to date, nor do we anticipate doing so. Our strategy is to confine insurance risk management to the underwriting side of the business - not to enhance investment yield." (Bernhard C. Fink) And yes. "Liberty Re has both invested in and helped structure a small number of securitised reinsurance solutions." (John Engeström). "As a reinsurer, we are also actively involved in securitised products and have invested in several of the cat bonds, insurance linked swaps and options, which have been on the market recently." (Henry Atzenweiler).
6. What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?
Not surprisingly this question produced a range of responses: underwriting skills and customer service, flexibility, creativity, the ability to work as part of a team, more sophisticated knowledge of financial markets. "The successful reinsurance professional today must possess a diversity of qualities: in insurance technique, in reinsurance technique, in market knowledge, in innovative reinsurance forms, in securitising risk, and all this accompanied by financial, actuarial, accounting, and consulting skills. (Hans-Jürgen Schinzler). The need for traditional reinsurance skills remains, but they have to be enhanced. "Reinsurance has always been a gentleman's business. Nowadays, those gentlemen have to be able to calculate accurately." (Wilhelm Zeller).
Probably, the most important qualities of all are those that allow the reinsurer to get close to the customer: "To truly excel, one must have a customer-centric view of the world." (Edward J. Noonan). "Some 20 or 30 years ago, you had to understand markets. What was important then was the rate but today it is the best solution. We have to understand clients and they are so diverse that we have to adjust for each one." (Jacques Blondeau).
7. Where do you believe the greatest opportunities lie for developing new reinsurance business and why? What, if any, class of business have you entered/re-entered in the last couple of years?
Specialisation and under-populated niches for smaller reinsurers, developing and reregulating countries and regions such as Asia, the Indian sub-continent and the Middle East for the Australian company in our survey. However, although growth in percentage terms may be highest in newer markets, in volume terms, it is likely to come from the most developed economies. "Looking to the year 2010, we anticipate that growth will slow in North America and western Europe, but those two regions will still represent the majority of the world market - perhaps 50% to 60%. We will therefore continue to pursue growth and profit opportunities on both continents." (James F. Duffy).
European companies in particular see life and health reinsurance as a major growth area. "Ageing populations, increased medical costs and ever more restricted public finances will lead to great opportunities to provide private insurance solutions complementing shrinking state benefits." (John Engeström).
ART, naturally, figures. "The greatest opportunities for new reinsurance business come from outside the boundaries of traditional reinsurance, which are fast disappearing to make way for integrated financial and reinsurance products." (Mark D. Mosca).
Relationships remain at the core. "The greatest opportunities lie in forging/solidifying relationships with the major players in the industry, which will be made possible through innovative products and services - multiyear, multiline covers, finite risk transfer, securitisation and the like." (Bernhard C. Fink). "Our relationships with brokers are of prime importance to us too and we aim for continuous enhancement of the service we give to them so that they in turn are best placed to meet their clients' needs." (Alan Howell).
Lee Coppack is co-editor of Global Reinsurance. E-mail: firstname.lastname@example.org.