Valerie Denney recently interviewed various leading reinsurers about their market's development to date and anticipated developments in the future.

Edward J. Noonan, American Re-Insurance Company, American Re Corporation.

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?

Reinsurance is in its essence a promise to pay that may not be called upon for years, or in some cases, decades. The pace of change is so rapid in the financial services industry, and the potential volatility so great, that historic notions of capital adequacy will quickly become outdated. In this context, size and capital strength cannot be over-emphasised. When it comes to long term security, bigger is clearly better.

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?

There are several factors that are causing shifts in reinsurance purchasing patterns. The first is the growth in the capital bases of primary insurers, which gives them greater ability to retain risk. Included in this is the tremendous ongoing consolidation among insurers. Another major factor is the low growth in premiums in the US and other developed markets. This pressure on growth is also causing insurers to seek greater net retentions in their business.

Driving these trends has been softening reinsurance pricing, which has caused proportional reinsurance to remain an attractive vehicle. There have also been a number of circumstances where primary insurers have retained too much risk, creating severe volatility in their results. So ceding companies have pared their list of approved reinsurers, putting much greater emphasis on selecting partners with unquestionable financial strength and cutting edge of professional expertise and services.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

Bancassurance products have established a firm place in the European market, but have been slow to take root in the US due to lingering regulatory obstacles. These constraints are rapidly disappearing, however, and we envision banks playing a much greater role in the sale and servicing of personal insurance products over the next few years.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

The reinsurance market is moving toward new and more valuable products for its clients. This is being driven by a more comprehensive understanding of client needs, the possible uses of reinsurance to address those needs, and the development of new financial and capital risk management products to help cedants optimise their results.

There are several important developments in this regard. The first is the analytical capabilities that Dynamic Financial Analysis has created. By looking at assets, liabilities, and all the risk factors that can affect a company, rather than simply claims exposures, we are developing great new insight into our clients' needs.

The second key aspect of this change is the increasing sophistication in financial instruments, which can be used independently or in conjunction with reinsurance to effectively manage risk.

Most importantly, this requires extreme customer focus and very close direct dialogue with the client to custom build the right risk management and capital optimisation programmes.

Very few reinsurers will have the size and financial sophistication to meet these challenges, and even fewer the financial strength to capitalise on the opportunities they will present.

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?

American Re did its first risk securitisation back in 1990, and has done others since, all for its own risk management purposes. Today we are in the process of building "second generation" securitisation vehicles which entail much more efficient capital utilisation. The ultimate result will be more cost efficient capital market tools for all classes of liabilities and exposures.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

The 21st century reinsurance professional must have a strong depth of expertise in the primary insurance business to fully understand the needs of their customers. They must also have a comprehensive knowledge of reinsurance usage and practice. Increasingly, there is the need for more sophisticated knowledge of financial markets and instruments, as well as how they can be used to manage risk for insurers. To truly excel, one must have a customer-centric view of the world, providing ever greater value to clients.

Having said all this, I believe that the key to excellence will be in one's ability to work seamlessly in multi-disciplined teams to deliver the best products and services to one's clients. The complexity of the business is such that the days of the singular expert are a thing of the past.

Edward J. Noonan is president and ceo of American Re-Insurance Company and American Re Corporation. Prior to assuming this position in March 1997, he was president of American Re's domestic insurance company operations, with responsibility for business with US insurance companies. He also serves on the American Re Corporation board of directors.

Mr Noonan joined American Re in 1983 as a production assistant in the treaty division. In 1989, he assumed responsibility for US treaty operations, and in 1992, for all business with US insurance companies. Before joining American Re, he worked in the treaty reinsurance division of North American Re. He has over 20 years of experience in the insurance and reinsurance industries.

Mr Noonan is a graduate of St. John's University with a Bachelor of Science degree in finance.

Jean-Marie Nessi, AXA Reinsurance

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?

Yes, $100 to $200 million. Yes, if total premium income does not produce a sufficient profit to remunerate his capital and surplus.

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?

Yes. There is a shift to more risk transfer and less virtual capital and surplus purchase. When risk transfer is concluded, it is more and more on a multiyear basis with a small number of reinsurers. Except for big traditional cat XOL, where the number of reinsurers does not reduce.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

Very little, except when the links are such that the capital and surplus can be added which allows a higher retention.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

A better cake, a smaller cake, but for a reduced number of guests. There will be more risk transfer, less traditional reinsurance. Finite forms of cover will not become the norm as long as they are not adequately rated.

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?

We carefully reviewed several deals but they did not present any interest for us. No. Never to avoid risk accumulation between assets and liabilities.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

Flexibility, imagination, risk understanding, and a strict technical approach. Less long-term good relationships sharing easy profit, more tough negotiation with a thin margin.

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?

New products, emerging markets and mutualisation of risk which cannot be mutualised locally by domestic insurance companies. We have left classes because of competition, not entered or re-entered.

Jean-Marie Nessi has been chairman and ceo of AXA Reinsurance since 1996. He has worked in the insurance and reinsurance sectors his entire career, beginning at La Paix, then moving to the Bayard Group and then Aster. He joined the Ancienne Mutuelle de Reassurance (part of the Groupe des Mutuelles Unies) in 1980. He became senior vice president of AXA Reinsurance in 1985 where he was in charge of the actuarial department, and co-ordination between Paris and the subsidiaries, as well as liability underwriting. He has been president and chief operating officer since 1990.

Erich Herrgen, Bayerische Rück.

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?

Security depends on a sound balance between risk exposure on the one hand and the assets available on the other. So it is not so much some minimum acceptable amount that is decisive but a sound ratio between these two elements. However, if you want to be perceived as a professional player by the market, you certainly need a critical mass, which in classical per-risk programmes could be something like a 10% line, while in cat programmes for earthquake, windstorm, etc, a decent reinsurer needs a capacity of several hundred million dollars per accumulation zone.

Yes, a reinsurer can get too large, if he is not properly organised. But by the same token, even a small reinsurer can quickly become bloated. Small is only beautiful as long as it is kept in good shape. Of course, the larger the reinsurer, the greater the probability that he is carrying around a lot of organisational flab.

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?

In our turbulent times, in which change is the rule rather than the exception, the insurers' approach to reinsurance programmes is bound to change, too. Certainly, the ongoing emancipation of direct insurance companies is bringing a shift toward non-proportional business. Yes, less bread and butter business is being ceded, and if this trend continues only the peak risks will be left in the reinsurance programmes. As regards the number of reinsurers per programme, there have always been primary insurers who preferred to deal with a manageable handful of reinsurers. On the other hand, there were also primary insurance programmes that were fragmented over 100 to 200 reinsurers, but today we can see a trend toward relying on just five to 10 core reinsurers. In catastrophe business, five to 10 reinsurers may not be enough, but here, too, the trend toward more manageable numbers is unmistakeable. Now this trend may well reflect the desire to reduce administrative effort in general, but 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. With shareholder value the order of the day, he has to make sure he is performing his executive functions properly, too. Rumour has it that some reinsurance directors have had to stop seeing visitors altogether.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

In such corporate links, the bank is first and foremost the primary insurer's marketing channel. When it comes to actually taking risks, bankers get cold feet. Whoever invented venture capital, it certainly wasn't a 20th century banker. Where insurers offer security, bankers demand it. For the banks, insurance risks - and especially reinsurance risks - are new risks, and as any risk assessment expert knows, new risks are something alien, something to be avoided. Bank assets are scared stiff of insurance risks.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

There seems to be a trend . . . Finite forms of cover will be used more and more for smoothing balance sheets, but they will never be the norm. Worldwide, there is an increasing market for genuine risk transfer. Finite risk covers are a fantastic supplement for traditional reinsurance. Of course, every deal must include a risk transfer component, but on the other hand pure financial considerations, that is the effects of fluctuating results on their balance sheet and solvency are at least as important to our clients. Our job as professional reinsurers is to offer modern products and competent advice both on the insurance and on the financial sides. Reinsurance is an integral part of asset/liability management.

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?

Without doubt there is a market for risk securitisation, and of course, Bayerische Rück is examining the possibilities. But in my view, risk securitisation is a supplement to the classical market rather than a substitute. As we see it, reinsurance is client-focused. If a reinsurance treaty runs for three years without major claims, we think the cedant is entitled to an imaginary bank account with the reinsurer on which he can draw in bad years. The capital market, by contrast, is strictly product-focused. It does not think in long-term dimensions and offers no continuity or opportunity for recuperation. The capital market is opportunistic, its only consideration being: is it going to pay off or is it not? Such mental one-night stands do not beget client loyalty. Besides, risk securitisation deals always have to be made to measure and are subject to administrative restrictions, which make them considerably more expensive than the traditional reinsurance market. By comparison with such tailor made straitjackets, reinsurance is the most versatile possible market for the transfer of risk. As a reinsurer I can get on a plane to London with nothing but my business card and can grant 50 million worth of cover without having to ask anybody but my conscience.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

In the good old days, all a successful reinsurer needed was a high-capacity stomach and high-performance liver. Even today, he still needs a sturdy constitution if he is going to be around to see the fruits of experience mature. But nowadays what the good reinsurer needs is not only the basic qualities such as risk awareness, astute risk evaluation facilities, price consciousness, the ability to take the right decision quickly, but above all a talent for identifying the right business partners. The key to success as a reinsurer today is a feeling for which insurer is amenable to establishing a long-term relationship in which both sides profit from the changing fortunes of give and take. In that respect, reinsurance remains a "people business," but the focus has shifted from the digestive to the mental plane. The risk focus has also shifted. Whereas earlier the emphasis was on specific lines of business and products, nowadays it is the balance sheet risks that command the reinsurer's attention.

Thinking in terms of lines of business and products has given way to a holistic client orientation. This is reflected for instance in the internal organisation of successful reinsurers, many of whom have restructured not along specialty lines or by types of treaty but by client group. Bayerische Rück has been a pioneer in this respect ever since the early eighties. Balance sheet analysis and portfolio analysis are elementary cornerstones of this client service mentality. Being in a long-term business, the successful reinsurer must also pay attention to continuity among the people who have contact with clients, and nowadays that means not just the directors and underwriters but also accountants and the chef de cuisine. A further virtue worth cultivating is one you won't find on the curriculum of any university: market intelligence. Know-how must be immediately applicable for practical use, not produced in a market-free vacuum. That formerly common species, the arrogant theoretician, is as dead as the dodo.

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?

We have found that our greatest opportunities for developing new reinsurance business are those left open by our competitors. The greatest opportunity of all is being better, faster, more flexible, more client-orientated, more anti-cyclical than the rest. The winner is always the one the client considers best.

Independent of this, central and eastern Europe is, of course, the challenge of this and the next decade for the reinsurance industry; just think of the potential afforded by compulsory motor liability insurance in Russia. Another major area for potential expansion is the rapidly developing Asian and Latin American markets. Even if they are still in a difficult situation, the number and motivation of the people involved is bound to produce a dramatic dynamism in the medium term. In life and health insurance, personal lines with a promising future, reinsurance will not be understood in the classical sense, because risk transfer is not the primary consideration in these lines. Instead, reinsurers will be expected to provide innovative forms of financing and new service fields: assistance in product development, design and pricing, for example, for dread disease, long-term care annuities and pensions. In a certain way, our greatest opportunities lie in our greatest threats. For we believe that where there is a risk, there is a market. Today's threats are the risk of change in the social sector, rising expectations and claims mentalities, changing values and concepts of what is reasonable and what is not, new social rules emerging in the course of globalisation and deregulation, dissolving old loyalties and giving rise to new inequalities. In this context, we see future opportunities in the throes and collapse of traditional government-operated insurance systems opening the way and creating demand for products from the private insurance industry. Just as technological progress generated new opportunities for reinsurers in the form of satellites and oil platforms, we look forward to the opportunities that social evolution is going to bring.

Erich Herrgen has been a full member of the board of management at Bayerische Rück since 1979. He joined the company in 1969, and was appointed a deputy member of the board of management in 1977.

William J. Adamson, CNA Re.

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?

The trend in the last three to four years is moving toward an increase in capital. Generally, the minimum requirement of capital for a reinsurer is $500 million.

The trend toward consolidation to reach size and scale will allow reinsurers to have global capabilities and maximise efficiencies. However, size alone is not as much of an issue as the ability to deliver client focused solutions in a responsive, flexible manner. Regardless of the size of a reinsurer, it is critical that the individual needs of a client are not overlooked.

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?

There appears to be a shift to non-proportional business. In some cases clients are more comfortable with an excess of loss programme. It is less costly and allows them to show a growth in premium.

The general trend among ceding companies is to consolidate the number of reinsurers on any given programme.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

In the US, insurance companies are starting to form alliances with banks. Insurance companies are continuing to look for ways to maximise their success in the future and see banks as a new distribution source. Banks have marketing capabilities and customer relationships in place that will enhance an insurer's ability to reach certain market segments, such as consumer and small commercial markets. Companies forming alliances with banks are not looking specifically to affect their reinsurance programme. They are looking for alliances that will allow them to stay competitive for the long term.

The link between banks and insurance may allow opportunities for reinsurers as it represents a new client segment.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

In the future, financial and securitised products will offer additional ways to protect against risk, along with traditional reinsurance. As clients become increasingly sophisticated, these forms of risk transfer will become more acceptable. Some of the factors driving the market toward securitisation include a mismatch between risk transfer needs and the capital base of the insurance industry, increasing demand, and restructuring of the insurance industry.

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?

Securitisation will have a significant impact on the future of reinsurance. Through Hedge Financial Products, Inc., a wholly owned subsidiary of CNA Financial Corporation, we have been able to experiment with securitised products.

Some of the solutions that the reinsurance industry is experimenting with include CBOT cat futures and options, CATEX, the launching of the Bermuda Commodity Exchange, and CatEputs, which are programmes that respond to specific events with equity or debt rather than loss recoveries. Most of the private issue cat bonds have involved the formation of single purpose reinsurers. While this approach is generally more expensive than an indexed transaction, it can be structured to provide full reinsurance coverage, versus options or futures which are tied to industry denominated indices.

Even with a robust securitisation market, reinsurance customers will still require traditional protection and "follow the fortunes" structures. The role of sophisticated reinsurance is likely to evolve into one where the reinsurer provides efficient pooling mechanisms for the exposures retained, ultimately translating a portion of that risk into the capital markets.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

The reinsurance market is evolving to a much more financial business today. This market is giving way to changes, such as those in the areas of securitised and financial products currently being explored. The reinsurance professional is required to have an understanding of these products and be able to offer client solutions. Reinsurers are also becoming much more technical in their approach to measuring the necessary return to maintain long term profitability. A competitive market and thin pricing require that the reinsurance professional understand the appropriate rate of return when selecting risks. Reinsurance purchasers are also becoming increasingly sophisticated. The result of these trends is a need for reinsurance professionals that possess the technical expertise required to operate in this environment.

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?

Opportunities for reinsurers lie in the areas of securitised products, as well as some emerging markets, such as Latin America and Asia. Clearly securitised products are developing for reasons cited earlier. Despite recent economic problems, Latin America and Asia offer intriguing long-term potential, as national economies in these regions develop. In the past couple of years, CNA Re has enhanced its capabilities to become a full service global reinsurer, offering the size and scope necessary to be successful in this market. Hedge Financial Products, Inc. was established by CNA Financial Corp. in 1997 to experiment with securitised products. As a reinsurer, we have furthered our capabilities by expanding into facultative markets in 1997 and globalising our treaty operations this year. We also established a Lloyd's syndicate and expanded geographically into Canada and Asia over the past couple of years.

William J. Adamson is chief executive officer of CNA Re, the reinsurance arm of Chicago-based CNA. He was named to this position in November 1995.

Mr Adamson is based in Chicago and is responsible for strategic direction, geographic development and growth of the CNA Re operations worldwide.

Previously, Mr Adamson served as president and chief operating officer, a post he held as of April 1994. Before that, he had been group vice president and chief operating officer since January 1993. Prior to being named vice president in 1987, he had been appointed assistant vice president in May 1985, division head and manager in 1981 and reinsurance underwriting manager in 1979. He became an underwriter with CNA Reinsurance Company Ltd. in 1977 after joining CNA in 1975 as a reinsurance underwriter-trainee.

Mr Adamson is also president of CNA (Bermuda) Services Ltd, which is the underwriting manager for LaSalle Re Ltd. (Bermuda), formed in 1993 by a group of investors, including CNA. He serves on the boards of directors of LaSalle Re and CNA Reinsurance Company Ltd.

Mr Adamson received a Bachelor's degree with distinction in insurance from the University of Arizona, Tucson.

Alan Howell, Eagle Star Re

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?

It seems to me that there is more than one answer to this question. Much depends on the reinsurer's corporate structure, its parental backing and its business mix and volume, each of which have a bearing on the level of shareholders' funds that brokers and cedants regard as acceptable. Most interested parties will also take a close look at a reinsurer's key ratios with respect to its solvency, its reserving position and its track record of profitability. In broad terms I would see a level of £100 million shareholders' funds as a generally acceptable amount. Developments in our global industry do point to the inevitable conclusion that size does matter - certainly more than it did in the past, and it is comforting for a cedant to equate size with strength. But as I indicated earlier, a reinsurer's size does need to be considered in relation to its portfolio and the amount of long tail business that it writes.

As to whether a reinsurer can get too large, I would say that provided the management remain agile in their ability to predict the effect of market trends, and provided they remain perceptive to their customer needs, then size should not be a problem. If we got to the stage of one supplier monopolising the market then that would be another story - but in my view that is far from likely.

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?

The fundamental shifts in the structure of the insurance industry that we have seen over the last five years certainly have brought changes in the way that clients view their reinsurance programmes. The overcapacity that exists in many areas of the market now has led to year on year reductions in pricing for many buyers and some have taken the opportunity to buy more cover at favourable terms. In some cases, consolidation among insurers has prompted an in-depth examination of their reinsurance requirements and in these situations, increased retentions are the norm. The resulting larger cedants tend also to favour higher level excess of loss protections. Reinsurers who have an international portfolio of clients will however find, as we do, that there is still a great demand for proportional reinsurance, whether from medium sized insurers, or from specialist writers for classes of business such as engineering.

As insurers reconsider their outwards programmes, they have reviewed the panel of reinsurers they use. In some cases this will have led to a reduction in the number of carriers, but in our experience it is more a case of insurers seeking to place their protections with reinsurers whom they know personally and with whom they can expect continuity in their relationship.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

We have not seen any major effects on our portfolio from corporate links between banks and insurance companies.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

Increasingly we see that our cedants want to be treated as individuals and to have their reinsurance needs dealt with on a tailor-made basis. We expect that clients will continue to seek customised solutions. These will range in their complexity from the traditional to the non-traditional but one feature will remain constant - no longer is it the case that a cedant can have any reinsurance policy he wants, so long as it is standard.

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?

We are keeping a watching brief on the products issued by the capital markets, but as yet we haven't found any solution that meets our catastrophe reinsurance needs better than our current arrangements.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

The successful reinsurance professional today has business acumen and is far more aware of the principles and practice of corporate financial management than was the case even five years ago. He or she will be IT literate and working in partnership with IT colleagues in the business to turn the mass of underwriting data into management information to control the outcome of the underwriting activity and to identify new opportunities. Add to that an outgoing nature, the verve and drive to be client focused, and an abundance of technical reinsurance skills and you have today's reinsurance professional.

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?

From the viewpoint of an international reinsurer based in London, there seem to me to be two big areas of opportunity for developing our relationships with our clients. On is for us to continue with our aim of getting closer to our cedants and their advisers, and provide them with local service. This we do through increased travel - throughout Europe, to Australia, to America and to the Far East - and through our Asia regional office in Singapore. The other is for us to continue to broaden our product range and thus deepen the professional expertise we offer our clients. Recently we have added specialist skills in engineering, in professional indemnity and personal accident classes, and we know that we can meet our clients' requirements across the board in marine and non-marine reinsurance. 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 was appointed managing director of Eagle Star Re in 1994. He was previously the company's underwriting and claims director.

His career began with a five year spell at British Engine, followed by 18 years with Trinity/Trident. He originally specialised in engineering underwriting and was ultimately appointed underwriting director, assuming responsibility for the marine and non-marine accounts. On joining Eagle Star, he implemented a strategic review of the non-marine facultative business, and subsequently, as claims manager, was instrumental in bringing the marine and non-marine claims section into a single operating department.

Mr Howell is a member of the management committee of Eagle Star Holdings and is a member of the board of South African Eagle, a subsidiary of Eagle Star and one of the largest general insurers in South Africa.

Bernhard C. Fink, ERC Frankona

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?

For a reinsurer to be able to offer adequate protection to the primary market a minimum surplus is certainly necessary. Minimum level depends on the book of business. As demonstrated by the consolidation in the reinsurance marketplace it appears under today's constellation that a reinsurer cannot be too large.

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?

With the consolidation in the primary market we are most certainly experiencing a shrinking market with respect to traditional reinsurance business. With increased capacities primary companies are shifting away from proportional to excess of loss. In addition, with the increased capacity primary insurers are decreasing the number of reinsurers on their programmes.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

In Europe there are long standing co-operation between banks and insurers with interlocking ownerships, which we envision continuing. In addition, banks have been increasingly marketing primary insurance in their pallet of products. In the US, the Glass-Steagal act prohibiting such co-operation between banks and insurers is shortly before repeal, with the impending merger of Travelers and Citicorp. This will cause most likely the same trend in the US as in Europe currently.

Hitherto we have not seen much of an influence of such co-operation on reinsurance programmes but would expect the convergence of banking and insurance might potentially also inspire reinsurers toward more alternative shapes of their reinsurance programmes.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

Given the consolidation in the industry coupled with increased capacity coming from non-traditional companies offering capacity to the reinsurance market, finite or alternative risk transfer programmes will most certainly gain importance in the industry. Insurance companies are still looking to smooth their results over the years but can keep an increasing portion of the risk on their books.

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?

We are working with various clients who are interested in tapping into the capital markets with respect to risk transfer. GE Capital and ERC are well poised for such an activity given our breadth of reinsurance experience coupled with the vast securitisation experience of our Capital Markets Services Group. 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.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

The successful reinsurance professional today must be a flexible innovator, who is constantly looking for creative solutions for clients. Traditionally, reinsurance professionals have confined their activities to the acceptance of risk as brought to them by traditional primary insurers. With the increase of non-traditional offers of capacity, opportunity will continue to come from new sources.

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?

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 is chairman of the board of management and ceo of ERC Frankona, Munich, and ERC Aachen.

Mr Fink, who studied law at the University of Tübingen, entered his professional career in 1977 with the Gerling Group where, during his initial years until 1979, he gathered international insurance experience in Cologne, New York, Paris, Stockholm and London. From 1982 on he was managing director of Gerling-Konzern Welt Service GmbH. In 1986 he was appointed a member of the board of management, where for 10 years he significantly contributed to the worldwide success of the insurance group, his last-held position there being member of the board of management in charge of distribution for all Gerling companies.

In June of 1996, shortly after the takeover of Frankona Rückversicherungs-AG by the American Employers Reinsurance Corporation, he assumed his current position as chairman of the board of management of the - renamed - ERC Frankona and ERC Aachen. He simultaneously fulfils a multitude of other managerial duties: he is ceo of the International Operating Committee of the ERC Frankona Group, managing director of ERC International Reinsurance Holding GmbH, Munich, and board member of Employers Reinsurance Corporation, Kansas City.

Frank Robertson, GIO Insurance Ltd

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?

All (re)insurance companies experience a tension between the desire to have as large an amount of capital and surplus as possible, to provide comfort and security to customers, and as small an amount as feasible, to maximise the rate of return to shareholders.

From a practical point of view, the current minimum capital and surplus for a reinsurer which aspires to a global presence would be about $250 million. More important, however, is to have at least an A rating from S&P or AM Best.

I do not believe that a reinsurer can become too large to be effective. The largest reinsurers today are capable of providing and frequently do provide excellent service to their cedants and intermediaries. In this industry, economies of scale still seem to outweigh diseconomies of size.

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?

GIO Re seeks to be an excess of loss reinsurer, except in developing markets where it is necessary to write proportional business to build relationships. We are not seeing, therefore, any shift from proportional to non-proportional business in our book. In developed markets we are seeing many primary insurers changing their approach to reinsurance in response to the current soft market conditions, involving:

* Working risk excess covers being placed on terms which are often below burning cost. Such business is often written by Lloyd's underwriters and others with risk excess reinsurance programmes which can turn a gross loss into a net profit.

* Sub-excess catastrophe cover.

* High level catastrophe cover for events with an estimated return period as high as one in 250 years.

* Aggregate/stop loss covers which at best smooth out quarterly earnings, and at worst guarantee a profit.

* Broader occurrence limits on risk excesses and proportional treaties.

* The introduction or increased use of no claims bonuses.

There are definite signs of a trend to reducing the number of reinsurers on a placement. Such reduction has the advantages of reducing administrative costs, and of enhancing relationships with the remaining reinsurers.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

At present we see no evidence that corporate links between banks and insurance companies are affecting reinsurance programmes. The effects so far all seem to be in the primary insurance markets.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

The reinsurance market will face its greatest challenge when a couple of major catastrophes (physical or economic) again create a hard market. At that time the capital markets will have the opportunity to carve out a real place for themselves as providers of an alternative risk transfer mechanism.

If the reinsurance industry reacts to a shortage of capacity as it has in the past, by rationing capacity through extremely high prices, the likelihood is that the global reinsurance market will shrink permanently.

Finite covers are either loved or loathed, but will certainly become more important in the future. They make a lot of sense for (re)insurers exposed to catastrophic events and volatile classes. Shareholders and share analysts are unimpressed by volatile profits and unexpected losses, and finite forms of reinsurance cover have an important role to play in reducing volatility. They can pass the regulatory and accounting hurdles provided that there is a reasonable element of risk transfer, and a great deal of innovative thought has gone into designing products which ensure that these tests are met.

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?

GIO Re has looked at using ART on a couple of occasions in the past, and on one occasion devoted considerable time and resources to the underlying study. The study was justifiable as self-education, rather than as providing a serious alternative to reinsurance. The ART market is still quite immature, and in current conditions seems expensive compared with traditional forms of reinsurance. Those major insurers who have bought ART products have probably done so more to keep the reinsurance market on its toes, rather than because they represented a better buy. It will be very interesting to see how the capital markets react when a catastrophe causes capital losses to investors in these products.

To the present, GIO Re has neither bought nor sold securitised products, but would be prepared to do so for the right price.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

The qualities needed today for success as a reinsurance professional are the same as they ever were, a combination of technical skills, marketing skills, risk tolerance, self confidence, reputation and common sense.

However, the balance between technical and marketing has shifted in recent years, as reinsurance markets have softened and profits have been harder to come by.

Underwriting has moved to a more rational and scientific basis. Underwriters now need to spend more time with actuaries, gaining deeper understanding of pricing, exposure and rate adequacy. A barometer of this is the number of actuaries in Lloyd's, increasing from a single actuary five years ago to a number in double digits today.

In the general management of reinsurers, much closer attention is now focused on questions of the amount of risk being retained, the level of capital needed to support the business, and the profit loadings needed to service the capital employed. The introduction of hazard models by most property reinsurers has led to much clearer understanding of exposure to a single large event, which was demonstrably lacking in the early nineties.

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?

Given the current levels of over-capacity in reinsurance markets, it is quite apparent that entering or attempting to grow in established markets will be very costly, and must be left to the few mega reinsurers.

For smaller reinsurers such as GIO Re, a strategy of specialisation and the seeking out of under-populated niches in the market is necessary for growth.

GIO Re in recent years has successfully developed a new contingency account, which is attractive because its risks are non-aggregating. While not new, our space account has developed very significantly in the last few years. These are two examples of classes where specialised knowledge is a prerequisite for success.

Geographically, GIO Re is finding itself able to grow profitably in Asia, the Indian sub-continent, and the Middle East. These are areas where Australia has advantages of proximity, time zones, and a reservoir of native speakers of the languages of the region.

Frank Robertson is executive director of GIO Insurance Ltd.

After working for 10 years for a large mutual life insurer in Australia and New Zealand, and spending 15 years as a consulting actuary in New Zealand, Mr Robertson joined the then Government Insurance Office of New South Wales (GIO) in 1989. He was appointed to open a representative office in Malaysia for GIO's international reinsurance operations.

In 1991, the NSW Government decided to privatise GIO through a public share offer, retaining no shareholding. Commuting between Kuala Lumpur and Sydney, Mr Robertson co-ordinated GIO's end of the privatisation process. This culminated in the successful float of GIO Australia Holdings Ltd as a public company in July 1992. Following that, Mr Robertson and his wife Colleen returned to Sydney, where he became GIO's group financial officer for three years.

In mid 1995, Mr Robertson became the executive director of GIO General Ltd, the direct non-life insurance operation of the GIO Group. In September 1997, he was appointed executive director of GIO Insurance Ltd, the group company of which GIO Reinsurance is a division.

Wilhelm Zeller, Hannover Re.

Is there a minimum acceptable amount of capital and surplus for a reinsurer today? If so, what level would it be?

The capital requirements of a reinsurance company are a function of the type and volumes of risk assumed by the reinsurer. It is obvious that a reinsurer writing solely less volatile life reinsurance business needs a lower amount of surplus than a company focusing on catastrophe business and/or long-tail US liability business. Furthermore, a seasoned, large and well diversified book of reinsurance business has a lower capital requirement for each additional unit of risk added to this portfolio than a small or a start-up reinsurance operation. Therefore it is - in our opinion - not realistic to determine an acceptable minimum amount of capital without knowing the size, the lines of business and geographical split of a given reinsurance operation. However, we believe that a newly established reinsurance company which wants to offer a meaningful capacity in all lines of business to its potential clients will need a starting surplus of at least $500 million in order to be considered as a committed and viable partner for the primary industry.

Can a reinsurer get too large?

Does the question refer to too large in respect of premium volume or in respect of surplus?

In respect of premium volume a reinsurance operation cannot get large enough. As mentioned above, the larger and more balanced a book of reinsurance business becomes the less surplus is required on a per risk-unit-basis to support this book. Hence a global, well diversified reinsurer can achieve a superior return on its surplus than smaller, less diversified competitors. This effect is also one of the drivers of the "merger mania" experienced in the reinsurance industry during the last couple of years.

In respect of surplus a reinsurer can indeed get too large. The favourable claims experience of the last couple of years, together with the rally in the capital markets have led to a substantial amount of excess capital in the industry. Considering the current soft market conditions it will be extremely difficult for these reinsurers with substantial amounts of excess capital to achieve an adequate return on their total equity. A strategy to address this issue are acquisitions, which are financed by this excess capital (second driver for the merger mania) and/or stock repurchase programmes.

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?

In most of the developed insurance markets the only chance insurers have to grow and develop their organisations further is by way of acquisitions and mergers. This is reflected by present market trends. By nature, larger organisations utilise their capital more efficiently and therefore require less reinsurance as a means of replacing capital. They buy less cover and carry larger retentions.

Over the past few years insurance companies have become more sophisticated in assessing their exposures and are therefore in a position to buy reinsurance more selectively. This is reflected by the growing trend to spend less money on reinsurance by buying more non-proportional reinsurance. This allows insurance companies to keep larger parts of their premium income for themselves while managing their cash flow and investment returns more efficiently.

In the early nineties a number of reinsurers either became insolvent, went into run-off or simply provided less reinsurance capacity than in previous years and this experience led insurance companies to review their whole approach to reinsurers. They realised the importance of reliable reinsurance for their peak risks. In order to protect their access to reinsurance an increasing number of companies started to build special relationships with a limited number of reinsurers with excellent security. Today, this is commonly known as the "core reinsurer" concept, whereby insurers expect a preferred status and high quality service from their reinsurers and in return attempt to involve them in most of their core reinsurance programmes. In many cases we have been able to benefit from this trend.

How are corporate links between banks and insurance companies affecting reinsurance programmes?

The corporate links between banks and insurance companies reflect the trends in many developed insurance markets, mainly those in Europe. Here, changes in the social security systems have led to the need for a greater variety of financial products than previously available and the insurance markets are now adjusting to the requirements of the individual customer. There are many advantages for banks and insurance companies in joining forces and in some cases this affects reinsurance programmes.

A merger between a bank and an insurance company will in many cases lead to a better balance of risk and a better utilisation of capital, with the result that the new entity is in position to have larger retentions. Furthermore, improved access to the investment markets will increase the desire to retain a greater part of the premium in-house. The reinsurance bought is shaped more and more by the need to protect the balance sheet and the shareholders' value as opposed to being directed at the individual risk. All this leads to companies buying less traditional reinsurance and searching for different reinsurance products which allow companies better control of their financial position. Reinsurers will have to adjust to these requirements by offering reinsurance solutions that are individually designed for each customer.

How do you see the reinsurance market developing in the future? For example, will finite forms of cover become the norm?

The reinsurance volumes will shrink in developed markets and continue to grow in emerging markets. Mergers, better understanding of the usage of capital and cfos taking over the reinsurance manager's responsibilities will lead to increased retention levels. Traditional reinsurance will decline in volume, but may benefit from a soft market for a short while.

Financial institutions have entered the field of reinsurance, reinsurers crossed the border to the financial sector's products. Those reinsurers, who approach these challenging times with an open mind, will blossom.

Cat covers and quota share laying off disproportionately high aggregates at inadequate prices cannot be the answer to the future. Advanced solutions and managed funds will be.

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? Should a reinsurer protect the values of a company as much as the company does itself?

Those who have answers to these questions will not feel the threat, but the challenge.

Advanced thinking, advanced solutions, this is the flavour of the year 1999 (and beyond).

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?

Hannover Re has been in the forefront of the development with our KOVER-Transaction which securitised worldwide top-layer catastrophe business (excl. US/Japan) in the amount of $85 million as early as February 1994. The structure of this very first securitisation in the world was through a special purpose vehicle located on the Cayman Islands.

In November 1996 we placed our second transaction, the K2-Swap (now including US/Japan and aviation excess of loss business) in the amount of $100 million. The swap-structure again was a worldwide innovation.

For our rapid growing life portfolio we again used a capital market structure in the amount of DEM 100 million, securitising acquisition expenses which otherwise would have tied up portions of our own capital. This treaty - also an innovation - was closed in April 1998.

All three transactions done by Hannover Re expose investors' principal in full and create a combined capacity of $240 million, which is still about 20% of the worldwide capacity created by all 18 securitisations done until June 1998.

On the risk taking side we have established close contacts with any active player in the field. That guarantees us that we get shown the relevant offers. If terms and pricing fulfil our requirements we are also active as investors.

In frequent discussions with clients we evaluate the pros and cons of transferring risk by securitisation in the current market environment. We are prepared to follow our clients' needs in this field if the demand increases.

What qualities must the successful reinsurance professional possess today? Has this changed in any way from previous years?

We expect versatility from today's reinsurance professional. On the one hand, a solid technical background is necessary in order to rate contracts and create new products. This implies an ability for clear and analytical thought as well as a feel for numbers. In this respect underwriting has close similarities to banking.

On the other hand, underwriters must also be excellent negotiators. That means listening to cedants in order to determine their needs and then to find solutions which are beneficial to both sides. This is the diplomatic aspect of reinsurance.

Last but not least, reinsurance professionals must be good representatives for their company. Accepted expertise coupled with a reliable personality and a communicative attitude toward clients will be the basis for successful marketing activities.

We believe that successful reinsurance professionals have always had to possess all these skills. During the past couple of decades, however, there has been a distinct shift in emphasis toward technical understanding. Reinsurance has always been a gentleman's business. Nowadays, those gentlemen have to be able to calculate accurately.

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?

We believe that significant new reinsurance opportunities are currently developing in life and annuity business worldwide supported by general economic and demographic trends in both mature insurance markets - for example, the UK and Germany - as well as emerging insurance markets - for example, Malaysia and Argentina, to name just a couple.

Reinsurers will become involved in a greater variety of assumed risks, including the longevity risk for annuity products, and will also be asked to provide comprehensive financial solutions in terms of protecting the "bottom line" results as well as the integrity of the balance sheets.

For competitive and rating reasons, solvency considerations will also become of paramount concern to many life insurers in continental Europe and reinsurers will be approached to provide solutions through reinsurance arrangements.

Therefore, a new breed of life reinsurer will emerge which combines in a value-added approach both risk transfer and financial components to suit cedants' needs by using sophisticated financial techniques. In the future, a reinsurer of this kind will, therefore, need much deeper insight into its clients' financial performance and relationships of loyalty with a selected number of cedants will form the backbone of a reinsurance portfolio.

Hannover Re is well prepared and equipped to tackle the challenges ahead in order to become a leading international life reinsurer by the turn of the century.

Wilhelm Zeller is chairman of the executive board at Hannover Re/E+S Re. Born in 1944, he graduated from the College of Insurance, Cologne with an economics degree. From 1969 to 1970 he worked with the Gerling Group in Cologne in the foreign department. From 1970 to 1977 he joined the Zurich Insurance Company in Frankfurt, then until 1995 was a member of the executive board at Cologne Re. In 1995 he became a member of the executive council at General Re Corporation in Stamford, Connecticut.

John Engeström Liberty Re.