Although one of the most global industries in the world, the reinsurance market is a pretty small club. Over the course of the summer, Global Reinsurance polled the members of this club to find out their views on the market. Replies came in from Bermuda, the US, Europe, Middle East and Far East, representing all the major reinsurance centres, plus a few of the smaller places. Each of the CEOs polled was sent a comprehensive questionnaire, the results of which follow. Every respondent was guaranteed anonymity, so no individuals will be identified, except where they were separately interviewed ‘on the record' by Global Reinsurance. All currencies were converted to US dollars using the average exchange rate for the appropriate currency over the course of last year.

Individual information
Of the respondents who answered the question relating to their age, the majority fell into the 51-60 years age range. This is unsurprisingly, bearing in mind that one-third of the respondents have been working in the reinsurance industry for more than 30 years, though the same number have been in the industry for between one and five years. To a certain extent, this puts paid to the view of some commentators that the industry is one that keeps within its ranks, rarely bringing in new blood from other sectors. In addition, the entry of reinsurance subsidiaries of other types of financial institutions such as banks is resulting in new people with new views on the direction the sector can take. Nevertheless, with only one-tenth of the respondents below the age of 40, and double that number over the age of 60, there is a question mark over the industry flow.

Survey respondents were particularly shy about answering the question on salary, benefits and shareholdings. So shy, in fact, that the information was insufficient to provide any meaningful data, so the results have been left out of the survey. A general rule of thumb is that US reinsurance CEOs are top of the remuneration pecking order, followed by Bermudian CEOs, then UK CEOs and finally continental Europe CEOs. There is, however, no way of verifying this with the data collected by Global Reinsurance, and nor can we make a comparison with CEOs from other territories since they, too, were reticent about providing this information.

The companies
Survey respondents ranged from single location to numerous offices around the world. Those companies with European locations were most likely to have offices in London, followed by Dublin. Other European locations represented included: Paris, Milan, Stockholm, Madrid, Frankfurt, Munich, Zurich, Luxembourg, Winterthur and Folkstone, as well as Turkey and Greece.

Far Eastern locations included Tokyo, Hong Kong, Singapore, Malaysia, Taiwan, Shanghai and Seoul, while one respondent noted offices in China. Latin America was represented with companies reporting offices in Brazil, Venezuela, Chile, Mexico and Columbia, while Canada was the location of operations for a small number of respondents. Further afield, two respondents reported offices in Australia – an interesting location since the local reinsurance market collapsed in recent years, and presumably leaving a void for the speculative reinsurer.

It is interesting to note at this point that the location of offices was very much polarised between one or two locations on the one side, and several offices distributed across the world on the other. This focus at either end of the scale was reflected in the number of employees in each of the organisations responding to the survey.

One-third of respondents reported having less than 100 employees, while the same proportion have more than 1,000 employees. Interestingly, none reported between 500 and 999 employees. This would appear to support the notion that reinsurance companies are either global giants with a wide range of product offerings or specialist boutiques focusing on specific lines of business.

The business
Gross premium income for respondents in 1999 ranged from $75.2m to $14.1bn. The following year, the gross premium income figures ranged from $93.8m to $16.9bn. All these figures were converted to US dollars using annual average exchange rates provided from the Bank of England. Changes in gross premium volumes ranged from –3.5% to 75%, with the average coming in at 18.6%.

Net premium income for 1999 ranged from $65.8m to $12.4bn, with 2000 figures ranging between $89.9m and $14.9bn. Changes over the period ranged from –2.2% to 75.5%, averaging at 24.8%.

The CEOs surveyed were then asked to state what they felt the change between the 2000 net premium income and 2001 net premium income. While only one respondent anticipated falling net premium income, forecasting a 4% fall, others either saw income stabilising or, more frequently, increasing. The most bullish response was an anticipated 70% increase in net premiums, though the average rise in net income was 16.9%. Net premiums as a percentage of total revenues ranged from 75.8% to 98.6%

Respondents were asked to explain any changes in revenues between 1999 and 2000. Reasons ranged from decreased realised gains from stocks due to falling market conditions; currency exchange rates; internal growth; acquisitions; increasing claims experience; growing property/casualty reinsurance rates; increase in financial reinsurance rates; increased program business; increased take-up of alternative risk financing products.

Across the organisation polled, the majority reported improving loss ratios in 2000 compared to 1999. This points towards the market becoming more disciplined in its underwriting decisions, quite possibly influenced by falling investment income, alongside the increasing loss experiences such as the European windstorms Lothar and Martin which happened towards the end of December 1999, and therefore did not have an impact on underwriting criteria until the following year when the claims started hitting the reinsurance market. During 1999, loss ratios ranged from 83% to 136.2%, and averaging 91.26%. The following year saw a marked improvement: ratios ranged between 61.7% to 88.4%, averaging out at 77.16%. Only half the respondents to the survey were willing to divulge the anticipated loss ratio for 2001, but of those that did, almost all were looking for an improvement and one anticipated it will go as low as 57.5%. On average, the anticipated loss ratio was 74.08%.

By contrast, expense ratios are less volatile. Respondents to the survey reported 1999 expense ratios ranging from 20% to 37%, while the following year saw expense ranging between 12.5% and 35.8%. Again, the CEOs were reticent about predicting the expense ratios expected for 2001, but those that were prepared to disclose them said they would range from 12% to 26.8%.

Respondents' books of business ranged between 100% non-life to 74% non-life business in 1999. On average in the year, life business represented 14% of their book of business.

This balance was maintained in the course of 2000, although one company did lower its life book of business by 53.8% compared to the previous year. This skewed the results of the analysis, indicating that on average the proportion of life business in reinsurers' books had reduced by 13.9% year on year. Again, figures were less forthcoming on the anticipated proportion of premium income from life business during the course of 2001. Of those CEOs that did answer the question, the majority saw the proportion increasing, with just one seeing it continuing at the same level. On average, the respondents to the question expected around 10.4% of their books to be life-related business. This represents a drop year on year, which could be a reflection of the demand in tough markets that businesses focus on their core competencies. In fact, life reinsurance is an increasingly attractive class of business for a certain reinsurers, and specialists in the sector have recently been setting up, particularly in Bermuda. However, some market commentators have speculated that eventually life business will be fully placed in the reinsurance market, with life insurance companies acting more as intermediaries than insurers.

Against this drop in life business has, of course, come a commensurate rise in non-life reinsurance. For 1999, treaty premiums represented between 93% and 100% of the business written by the survey respondents' companies, averaging out at 97.02%. The following year, they ranged from 95.1% to 100%, this time representing 97.35% of total premiums, on average. More respondents were willing to disclose anticipated volumes for 2001, which ranged from 90% to 100%, though only one respondent recorded a meaningful drop in the volumes written.

Respondents were then asked to outline what are the biggest factors contributing to their businesses' growth. The most popular response was the rising premium income environment, which was cited by every respondent. The next most popular reason was the rising customer base, followed by investment income streams.

Perhaps surprising, mergers and acquisitions featured at the bottom of the list, though this perhaps reflects the fact that most of the activity now appears to be complete. Other factors disclosed included increased securitisations activity and advisory roles.

Survey respondents were then asked about the biggest constraints to their business. By far the greatest worry to reinsurance CEOs is a lack of skilled staff. This has been a perennial problem in an industry which is often viewed as the poor relation to the investment banking sector. There are many opinions as to why this should be, several of which focus on the relatively low wages in the reinsurance sector compared to the banking sector. Even at CEO level, it is commonly accepted that a CEO in the capital markets business will receive ten times the salary and bonus levels than his or her equivalent in the reinsurance market. At the same time, a bright star in the reinsurance sector is likely to be lured across to the capital markets business, particularly now it is looking closer at alternative risk transfer products which to a certain extent perform a traditional reinsurance function. Thus, there is a net skills outflow. Until these and other issues such as the perception of the industry are changed, there is likely to be little progress in the issue of staff quality.

Of some concern is the second most popular answer to the question; that inadequate infrastructure to support growth is stopping the increase in business. With this being cited as a major constraint by 91% of respondents, it bodes ill for reinsurers being able to take advantage of the current upturn in market conditions. If infrastructure is already preventing business growth, what chance is there when ideal market conditions prevail?

Reductions in the levels of client servicing and shortage of capacity both hit the 45% mark with survey respondents, while 27% felt that the inability to break into the global market was constraining their growth opportunities. Whether this continues as an issue as domestic markets tighten remains to be seen. Finally, long-tail exposures and cash flow problems were also seen as growth constraints, though no respondents felt that either diluted company cultures or limited time to consider their long-term strategy had an important impact on the business. Other factors noted by respondents included adequate capital, insufficient premium rates, mispricing of insurance risks by traditional providers of coverage, getting an appropriate balance between risk and return, transparency on changes in exposure, maintaining high levels of customer service, and the profitability of the reinsurance markets.

Perhaps unsurprisingly considering the concern over adequate infrastructure, developing it to support future growth was seen as the biggest challenge by the CEOs who responded to the survey, all of whom saw it as a major issue. Developing potential leaders came in as the next greatest challenge. Again, this ties in closely with the view of most CEOs that a shortage of skilled staff is a major constraint to the business. Around half thought that maintaining levels of client servicing was one of the major challenges in their role, also reflecting their views on constraints to business growth. The quality staff issue again comes to the fore, with 43% of respondents seeing one of their major challenges as recruiting and competing for quality staff. With what would appear to be a limited of pool of reinsurance professionals, if these issues are causing a severe problem, it may well be that good executives will be able to command the prime jobs – and salaries - in the industry.

Managing mergers and acquisitions activity, making investment/capital allocation decisions, and globalising operations all came in before cost controls, and make an interesting reflection on the oft-cited demand that the industry is overly weighted with costs and needs to substantially reduce them. Whether this issue is fading as a major problem with the hardening market is open to question.

Strategy appears to be of little interest to reinsurance CEOs. Just 21% reported that devoting time to developing long-term strategy. None of the CEOs polled thought that either e-commerce capabilities or long-tail exposures were amongst their biggest challenges.

Other challenges cited by the survey respondents included: adequate capitalisation; building an investor base for insurance securities; developing the convergence of applications in the capital and traditional markets; and setting a clear vision for the company.

Of the companies that responded to the survey, the geographical breakdown of their business showed a skew towards Europe, with 46.1% of their business emanating from the region, on average. However, in reality this percentage ranged from 4.5% to 98%. North American business represented 30.4% of premiums on average, though again the variation among the survey respondent ranged from 0% to 69.2 On average, the next most important source of premiums is the Far East/Asia, representing 14.3% of the total. Again, this is a wildly fluctuating figure, ranging from 0% to 92.1%. Other areas of the world figure only marginally for all respondents. What these results do reflect is again the split between global reinsurers operating across the world and those writing business in their domestic markets.

The market
Every respondent to the survey perceived fluctuations in the reinsurance cycle as the most threatening market issue facing their business. Particularly as the industry is still in the early stages of coming out of particularly lax market conditions, and correspondingly poor returns, it is hardly surprising that the cycle is not viewed as a particularly desirable feature of the business. Again, it will be interesting to see whether the upswing changes this opinion, though results smoothing has often been a major aim for companies in the sector.

Industry consolidation garnered 80% of the CEOs' votes as a threatening market issue. Consolidation inevitably means lack of choice for the buyer, though at the same time it lowers competition. It may also lead to a few market-dominating organisations which dictate terms across the industry, and smother smaller organisations.

Regulatory issues and changes in the type or level of competition were equally thought of as the most threatening market issues, with 35% of respondents mentioning them. On both sides of the Atlantic, reinsurance regulation is under scrutiny; in the US, the tax treatment of Bermudian reinsurers is still hanging around Capital Hill, while European reinsurers are braced for a reinsurance directive in the not so distant future.

Despite the almost defunct retrocession market, only 30% of respondents saw difficulty in purchasing retro cover as a major market threat. In fact, it could be argued that the withdrawal of retro has been a major factor in the current market upturn. A quarter of survey respondents were concerned that global economic instability may be a threat to the reinsurance industry, and 15% saw emerging market instability as a potential problem. Competition from alternative risk financing sources and environmental issues did not hit any of the CEOs' radar screens as market problems.

Despite industry consolidation ranking second in the ranking of threatening market issues, the respondents were obviously secure in their own businesses; none of them perceived defending their company from hostile bids as a major market problem.

Another item not to cause any concern is the e-commerce revolution. A quarter of all respondents said that e-commerce has had no impact on their business over the past year, while 13% perceived it to have had a ‘very significant impact'. Of greater impact is the effect of institutional investors; 38% of respondents said they have a ‘very significant influence' on corporate strategy.

Finally, the vast majority of respondents see the future to be bright for the reinsurance sector, with 38% predicting significant market growth over the next three years.

All the survey respondents are in one way or another bullish about the prospects for the reinsurance market. Whether they be global giants or local companies, they are all expecting growth in the near future. Nevertheless, they are aware of the challenges facing them, with the lack of talented and skilled staff a particular problem.

Global Reinsurance would like to thank the reinsurance CEOs who took the time to fill in and return the survey. A fuller version of this report will be sent to all respondents.