A move to Zurich is enabling more and more firms to hit the business their existing bases cannot reach. But despite the tax benefits and being a Solvency II-free zone, the move is not without its challenges. And a warm welcome from local players is far from guaranteed
Switzerland has suddenly become the place to be for growing reinsurance groups. Less than two months after Lloyd’s (re)insurer Amlin announced its intentions to set up a reinsurance company in Zurich, rival Catlin followed suit with its own plans for a new $1bn business. A week later, on 5 July, Tokio Millennium Re, the reinsurance division of Japanese insurance group Tokio Marine, revealed that it had chosen Zurich as one of the locations for its two new reinsurance offices as part of an expansion and restructuring plan.
The three newcomers’ aim is simple: tap the continental European business that never makes it to their established bases of operation.
“Reinsurance business from the smaller European cedants does not typically cross water to London, Bermuda or the USA,” Catlin spokesman James Burcke says. “People like to buy locally. In addition, Europe is a direct market, while London and Bermuda in particular are broker markets. If you want to write this business, you have to join the market.”
But the moves raise a number of questions. The first is why firms would choose Switzerland rather than Germany or France.
The country’s more favourable tax regime may have been a consideration, as may the fact that it is outside the EU, and thus allows reinsurers to write European business without being subject to the European Commission’s Solvency II directive, whose effects are currently unclear.
The reinsurers themselves, however, give different reasons. “When you make a decision like this, tax is always a consideration. However, we selected Zurich because over the past five years we have seen it emerge as the real reinsurance centre in Europe,” Burke says.
In addition to Swiss Re, Zurich is home to a number of reinsurance companies and subsidiaries of larger groups, and so has many of the facilities a new firm will need. “Switzerland provides Amlin with strategic flexibility, a strong professional workforce, and a solid legal and regulatory environment. One of the key drivers was the availability of good-quality, experienced underwriters with an in-depth knowledge of the European markets,” Amlin Re Europe chief executive Philippe Regazzoni says.
No straight run
The timing of the launches, when the global reinsurance industry is in the throes of a soft market, and the fact that their target market is dominated by the most formidable players in the business, might also be questioned. Some feel the new entrants will find breaking into continental Europe a challenge because of the incumbents’ desire to hang on to profitable business, the tight relationship between reinsurers and cedants, and the fact that they will not be able to rely on brokers to make introductions. In addition, the influx of new players could boost competition, making conditions even tougher.
“Any company is going to be attracted to large markets where there are profits to be made, but getting to the good business is not going to be that straightforward,” says stockbroker Collins Stewart’s analyst, Ben Cohen.
In addition, they run the risk of alienating their suppliers. “The large European reinsurers are generally the biggest providers of reinsurance capacity to the primary businesses of Lloyd’s companies, so they will need to be careful about how they compete with their capacity providers,” Cohen says.
Banking on Solvency II
Reinsurers are relying on the fact that Solvency II, which comes into force in January 2013, will increase demand for reinsurance, as cedants seek greater protection from a more diverse panel of providers. “From our perspective, the pie is getting larger,” Tokio Millennium Re’s president and chief executive Tatsuhiko Hoshina says.
But some question whether the benefits of Solvency II merit the attention being lavished on Zurich. “More insurers coming in is definitely not good for the established players,” Cohen says. “There is a little more opportunity in Europe because of Solvency II and the need for capital relief, but certainly not on the same scale as there was in moving to Bermuda after Hurricane Katrina, which offered a very near-term payback.”
While Solvency II is still three years away, the reinsurers are not pinning all their hopes on opportunities from the directive. Catlin, for example, will initially write political risk and trade credit reinsurance. “There is a relatively small number of companies in Europe that underwrite this coverage, and there is a significant need for capacity that we believe we can fill,” Burke says.
In addition, the newcomers are willing to be patient, and are not expecting immediate results, Hoshina says. “Especially in the European market, where the relationships between reinsurers and cedants are very tight, we don’t expect to be able to get large shares from day one.” GR