A new Danish scheme for monitoring and supervising reinsurance programmes is exciting considerable overseas interest and could help to speed changes within the industry. Mark Baylis reports.
From January 2000, Danish insurers have been required to register their reinsurance programmes with the country's financial services' supervisor, who has the power to instruct them to make good any material deficiencies.
The scheme affects 118 insurance companies, around 230 - 240 corporate reinsurers and more than 100 Lloyd's syndicates, and it is being watched closely overseas. The Danish authority, FiNANSTILSYNET, has already had visits from the Far East and other parts of Europe, and it was one of the talking points at December's meeting of the International Association of Insurance Supervisors (IAIS) conference in San Francisco.
If the Danish approach catches on it will affect the shape of reinsurance buying, speed the “flight to quality” and, according to some observers, act as a further catalyst towards consolidation within the reinsurance industry.
The scheme was formally launched at the start of this year, but had been operating on a pilot basis since late 1998. It was instigated by Michael Holm, who became director of non-life insurance and reinsurance at FiNANSTILSYNET in 1992.
“Two things were apparent,” says Mr Holm. “Firstly, reinsurance was the biggest area of potential vulnerability for most Danish insurers. Secondly, we knew very little about the subject, so we really ought to do something.”
At the time the future of Lloyd's, which was and remains one of the country's biggest suppliers of reinsurance, was in doubt. Several other international reinsurers were in difficulty or closing down altogether, in some cases leaving behind bad debt.
Mr Holm says it was an unsettling period. “We are accountable to the Danish public as policyholders, and we felt it our duty towards them to become more proactive in our supervision of reinsurance.”
The system works like this. All treaty (but not facultative) reinsurance programmes are registered with FiNANSTILSYNET, which has devised its own ratings system as a supervisory tool to assess the quality as well as quantity of cover purchased.
Quality is measured according to five weighted criteria, agreed with the major players in the Denmark:
• Reserving provisions as a percentage of net premium income;
• Gearing ratios;
• Combined ratios;
• Return on equity;
• Return on investment.
The authority will then discuss the programmes - usually on an annual basis - with the insurers. It has the power to order remedial action, but this is only a last resort. “The emphasis is very much on dialogue and discussion - on asking the right questions,” says Mr Holm.
Although the information is confidential, FiNANSTILSYNET is able to build up a profile of the entire Danish market; it will also help them to identify any brokers who may be bringing poor quality reinsurance into the country.
Henrik Haugaard has experienced the system from both sides. Previously a reinsurance buyer at the Danish mutual insurer Alm. Brand, where he was involved in some of the early discussions with FiNANSTILSYNET, he became assistant general manager at Copenhagen Re in February, 1999.
“It gives a fantastic overview to the financial authorities,” he says. “It could be used to sort out any potential weakness of the market in the area of reinsurance or to identify excessive concentration.”
FiNANSTILSYNET will send out a rating for the entire market in April, assessing the average overall quality of reinsurance in Denmark. It will also send individual insurers their own confidential ratings, so that they know how they compare. The idea is that this will provide a benchmark, and spur those who fall behind the market norm into making improvements. This, in turn will raise the overall average and create a “virtuous circle” as reinsurance buyers keep up with an ever-improving standard.
Service - not threat
Mr Holm insists that these new regulatory methods are a service to insurers rather than a stick to threaten them. “Our experience so far,” he says, “is that reinsurance buyers see the value in what we are doing. They see it as supporting their companies.”
One of the issues that emerges time and time again is how the sheer volume of inwards reinsurance programmes makes it difficult to see the big picture - an area where a supervisory authority can act as an independent pair of eyes.
The impact on reinsurers is likely to be more mixed. The authority rates reinsurers out of 100, with 50 being an acceptable level of security. FiNANSTILSYNET will never replace the ratings agency as it lacks, among other things, their depth of analysis. Nonetheless, at least everyone knows the rules, and this system will put pressure on those providers that fail to make the grade in the eyes of FiNANSTILSYNET.
It is, of course, too early to declare the scheme a success until it has been fully tested. A key hurdle will come in January 2001, when it is scheduled to become entirely electronic. Meanwhile, it is hard to find anyone who, even in private, does not back it in principle.
“We support this all the way,” says John Hansen, vice-president at Trygg Baltica. “You can compare yourself with your peers. It will not change the reinsurers we use in the short run, but we will have some explaining to do if we differ from the marketplace.”
Richard Bader of Munich Re, who was among those consulted by the authority, says it is innovative and deserves support. “It will help make the market better informed and improve people's understanding of their reinsurance cover.”
Mr Haugaard of Copenhagen Re agrees: “Good security reinsurers have nothing to fear. We have an interest in the market being professional and intelligent in the way that it directs and supervises its financial activities.”
The Danish market, on its own, is too small to make a big impact on the world reinsurance market but, if the principles behind this scheme gain wider and broader acceptance, then clearly it could make a difference to the pattern of reinsurance buying.
Sue Copeman, of Insurance Research and Publishing and author of a recent report on mergers and acquisitions within the insurance industry, says the scheme could encourage consolidation among reinsurers.
“These are very early days, but this is likely to add to the flight to quality that we are already seeing among reinsurance buyers. That will inevitably add to the pressure on small, vulnerable reinsurers.”
Mark Baylis is a marketing consultant specialising in international (re)insurance.