Franklin W. Nutter examines current trends in US reinsurance, with some interesting conclusions.
No segment of the insurance industry is experiencing more fundamental change than reinsurance. The decade of the 1990s marks a near total restructuring. The initial phase continues unabated, redefining who the players are and what their capital positions have become. The second phase involves a redefinition of the nature of reinsurance as it blends between traditional reinsurance and features of investment banking.
Looking at the United States reinsurance industry over the last 30 years, the picture shows that the top 25 companies have maintained a dominant place on the basis of premium and surplus. The industry has been - and remains - one marked by a relatively small number of well capitalized companies. Of interest in that 30-year period, the top five companies have lost market share on the basis of premiums and surplus. What is truly remarkable, however, is that references to the top 25 companies are completely misleading. Of the top 25 companies in 1967, 18 are no longer in business under their original name. Indeed since 1990, eight of the top 25 companies are no longer in business but have been acquired, merged or withdrawn.
In two years, 1995 to 1996, the most dramatic period of change among the players in the industry occurred. Consolidation, mergers and acquisitions became a dominant theme.
The industry seemed to rest in 1997 but 1998 has marked a resurgence in market consolidation as major reinsurers acquire or merge with other reinsurers. The trend is notable throughout the reinsurance industry worldwide as Bermuda reinsurers diversify away from pure property catastrophe risk and European reinsurers have grown through international acquisition. The reasons for the dramatic consolidation in the reinsurance industry are varied. Some companies have acquired others to increase a foreign market presence; others have sought to diversify into life or accident and health reinsurance in order to take advantage of emerging opportunities. Still others have sought to enhance a domestic market position or to add a specialization through acquisition of a competitor. Lastly, some reinsurers have engaged in acquisitions or mergers to reduce the volatility associated with the lines of business they have served.
Clearly investor pressure has encouraged consolidation. Seeking premium growth in a very soft market has led some reinsurers to apply their enhanced surplus position to acquisitions. Market pressures and rating organizations' emphasis on risk based capital have placed some reinsurers in the position of needing to seek a partner in order to satisfy client or rating agency demands. It has also become clear to market analysts, however, that the move toward higher capitalized reinsurers has not compromised the upside potential of niche reinsurers in specialty markets or with unique expertise. Companies focused on this expertise have proven they do not have to have huge capital bases to be a player in the markets they have targeted.
Even with the consolidation activity the amount of capital committed to reinsurance has remained high. In fact, little if any capital has withdrawn from the industry during this period when industry surplus doubled. The by-product is that a very competitive marketplace is still fueled by stronger and better capital positions than the industry previously has seen.
The second fundamental shift in the industry in the 1990s has been the emergence of capital and financial market risk-shifting. Both reinsurance and capital market products address similar problems: earnings volatility and shock losses. To some, the emergence of traditional capital market players into special reinsurance type transactions or securitized insurance products is a real threat to the viability of the reinsurance industry. After all, they reason, capital markets offer tremendous financial capacity - particularly for property catastrophe needs - and investors are looking for risks uncorrelated with traditional capital markets. Reinsurers, however, have demonstrated that they can both compete with capital market products and assimilate them into a risk transfer approach. Why not, reinsurers argue; after all, capital markets give reinsurers retrocessional capacity that did not previously exist. More importantly, reinsurers are demonstrating to their clients that the services associated with financial capacity are important in building a healthy long term relationship. Looking at clients holistically, many reinsurers now mix risk transfer and risk financing products to benefit a client's financial picture. The message is that reinsurers are not transactional markets but seek to build relationships with clients on a long term or integrated basis.
This last fundamental trend, that of convergence of reinsurance and non-traditional risk transfer and risk financing approaches, will continue for the rest of the decade as a fundamental change in the nature of reinsurance. Whether further major consolidation continues, however, is speculative at best. Some of the recent major transactions make sense in retrospect but were not anticipated by the marketplace. Consolidations among medium size and smaller firms probably make sense when seen from an investor's point of view but may not from that of management. Future consolidations may, however, come between capital markets or financial institutions and reinsurers rather than intra-industry.
In summary, the reinsurance segment of the industry has been in the throes of a dynamic restructuring, both as to who the players are and how they see themselves in the risk transfer and risk financing markets. These clear trends are likely to continue as reinsurers redefine themselves to meet client needs as well as competitive pressures.
Franklin W. Nutter has been president of the Reinsurance Association of America (RAA) since May of 1991. He held the same position with the RAA from 1981 to 1984. Prior to becoming president of the RAA in 1981, Mr Nutter served as the Association's general counsel from 1978 to 1981.
In the interim, he was president of the Alliance of American Insurers and the Property Loss Research Bureau.
Mr Nutter has chaired the Natural Disaster Coalition, an effort to develop a program to respond to catastrophic earthquakes, hurricanes, and volcanic eruptions in the United States. He served as a trustee to the National Commission Against Drunk Driving, and has served as a member of the board of directors of the Advocates for Highway and Auto Safety, the Insurance Institute for Highway Safety and the Workers Compensation Research Institute and the board of overseers of the Institute for Civil Justice, a subsidiary of the Rand Corporation. Mr Nutter is also a member of the Department of Commerce's Industry Sector Advisory Committee on Services for Trade Policy Matters. He is a member of the Insurance and Reinsurance Study Commission created by the Florida state legislature and has been active on reinsurance advisory committees and task forces of the American Bar Association and the National Association of Insurance Commissioners. He served on the faculty of the American Institute's first advanced education program and also served on the Brookings Council, an affiliate of the Brookings Institution in Washington, DC.
Mr Nutter has a bachelors degree in economics from the University of Cincinnati and a Juris Doctorate from the Georgetown University Law Center. He is a Vietnam veteran and is listed in Who's Who in America.