The main talking point in the Nordic reinsurance market recently has been the December 1999 storms in Denmark and parts of Sweden. This event has forced many people, both within and outside the insurance industry, to reconsider their approaches to risk management. Of more influence in the long term, however, is the process of reconstruction and consolidation that has been taking place within the primary market.
The storm named Anatol may have been small by the standards of the larger storms that struck France and Germany, Lothaer and Martin, but it was the worst on record in southern Scandinavia. It was aggravated by a shortage of building workers and the fact that there were actually two storms within days of each other. Temporary repairs carried out after the first were rapidly undone - forcing people to pay for two sets of damage.
Because it was 18 years since the previous big storms in the country, costs were further increased as insurers ended up paying for shortcomings in building maintenance. In the intervening period, building regulations had changed. For example, the law now requires scaffolding for repair work above a certain height. Insurance companies that had used inflation indexing methods to calculate their exposure often found this method inadequate.
Although confined to one part of Scandinavia, Anatol has reverberated throughout the region. The cost in Denmark is currently estimated at DKK 10 - 12 billion ($1.8 billion), but is likely to rise further. Anatol exposed weaknesses that were not previously thought to exist. Governments are now reconsidering their building regulations in light of the lessons learned. Quality improvements are clearly needed, especially in the agricultural sector and where fast-build homes are involved.
As far as Danish insurers were concerned, Anatol revealed serious failings in their own coverages. This is something for all concerned, including reinsurers and brokers, to get to grips with. The event has forced a fundamental review of reinsurance programmes.
A recent trend throughout Scandinavia has been towards ceding less reinsurance, with a shift from proportional to non-proportional. There has also been a tendency to combine catastrophe and risk programmes into one, which reduces the total cost but also leads to less transparency. In Denmark, virtually every insurer went through its reinsurance layers last December, even relatively large players. One company, for example, had a loss experience of DKK 1 billion more than its reinsurance cover.
Small, mutual and local insurers were as badly affected. Denmark has traditionally had a large number of small, cash-rich insurance companies, often with strong local bases. Many of these have lost a third of their capital, and face pressure on their independence. Reinsurance buyers are looking again at the size and quality of their covers. The inevitable result will be more reinsurance and higher rates. Although the worst effects of Anatol were confined to one part of the Nordic region, the lessons are being applied in all four countries.
It would be wrong, however, to single out insurers for blame in this state of affairs. Many companies - brokers and reinsurers, as well as insurers - used simulation models to calculate the need for catastrophe capacity. These will now have to be adjusted in the light of this recent experience.
We all need to understand why, despite extensive use of catastrophe modelling systems, nearly everyone underestimated the potential losses. With the benefit of hindsight, we should have been advising our clients to buy more protections. The outcome has to be a critical evaluation of the tools we use to estimate exposure, and a reliance on a wider range of methods for calculating needs. There are clearly many lessons to be learnt from the storm, and it is to be hoped that information will be pooled so that we are better prepared next time around.
In the short run, the outcome will inevitably include hardening rates. There is likely to be a flight to quality, as some reinsurance buyers reassess long-standing relationships. Even more than before, there will be an emphasis on excellent security and getting to know your customers. Flexibility and an ability to offer alternative reinsurance cover, including balance sheet protection, will also become more important.
These are beneficial developments. For too long reinsurers have been providing cover at unprofitable and, in the long term, unsustainable rates.
Another consequence is likely to be a strengthening of the long-term trend towards consolidation in the primary market, which has obvious implications for reinsurers in the region.
The most important recent manifestation of consolidation has been the creation in 1999 of If ..., a pan-Scandinavian company that has already established itself as one of Europe's top ten insurers. An alliance of three of the most prestigious names in the region - Skandia in Sweden, Pohjola in Finland and Storebrand in Norway, it is looking for a Danish partner. Should this happen, If... will be propelled even higher up the league table.
If... is attracting huge interest throughout Scandinavia. Its progress will do much to determine the shape of the region's insurance and reinsurance markets. It has the potential to become the dominant force. In Norway, for example, Storebrand has nearly 50% of the market. On the other hand, Pohjola is known to be reconsidering its position in the alliance, with withdrawal a possibility. At the time of writing, a decision is thought to be imminent.
The emergence of If... is a logical extension of decades of rationalisation within Scandinavia, and it is not the only example of rationalisation. Codan of Denmark (owned by Royal & SunAlliance) has joined forces with Tryg Hansa (Sweden), Nordenfjeldske (Norway) and Lietuvos Draudimas (Lithuania) and is searching for new merger partners. The same goes for the latest merger between Unibank (Denmark), which owns Tryg Baltica Forsikring (Denmark) and recently merged with Vesta (Norway), as well as Merita Nordbanken (Finland), which has owner interests in Sampo (Finland).
At present, it is not clear where these developments will lead. Seen from outside, Scandinavia may seem homogeneous, but there are real differences in mentality from country to country, which might be an obstacle to the establishment of Nordic cross-border companies that otherwise seem logical. A further unsettling feature is the growing interest of banks and other institutions in insurance, and the emergence of a supermarket concept in financial products.
In a market where there is little room for organic growth, in either insurance or reinsurance, one company's gain can only be at the expense of someone else.
There remains, nonetheless, a wide range of respected smaller insurers in all four countries. Here, too, mergers and acquisitions have been increasingly commonplace, with banks taking a growing share of the sector. While much of this consolidation has taken the form of conventional merger and acquisition, there are a number of arrangements where smaller companies have formed themselves into self-help pools to make joint purchases of reinsurance and enable them to offer customers a wide range of specialist cover. Two of the best established are L.W.A.B. in Sweden and Gjensidige Skade in Norway. With the recent storms, this type of pooling arrangement could become more widespread as companies seek to ensure their survival as independent entities.
The consolidation trend has tested the strength and durability of the region's reinsurers. Out of more than 50 companies writing reinsurance 15 years ago, there are now just three major indigenous Scandinavian survivors - Copenhagen Re, Sirius and Folksam. All three are established international reinsurers that have long looked to other parts of the world for the bulk of their customers. Yet, despite a long history of buying reinsurance internationally (especially from large European companies and Lloyd's), Nordic insurers continue to place a significant proportion of their business locally, valuing the greater knowledge that comes from underwriters who live and work in the region.
One lesson to be learned from the history of the Scandinavian reinsurance market is that companies should stick to their core strengths and avoid diversifying into highly competitive new areas where they have little experience. It is no coincidence that Copenhagen Re, Sirius and Folksam, are all professional reinsurers with track records going back at least 50 years. Today it is fair to say that the Scandinavian reinsurance industry, although reduced in numbers, is more stable than it has ever been.