XL Capital and Les Mutuelles du Mans Assurances (MMA) have agreed to form a new French reinsurance company, Le Mans Ré. Subject to certain conditions including regulatory approval, the new company will be based on the existing business of MMA's reinsurance division, Mutuelles du Mans Réassurance, with a cash injection of FrF 600 million from XL Capital. Total capitalisation will be of FrF 1 billion. MMA will hold 51% of the shares in Le Mans Ré and XL Capital 49%.At 1 January 1999, the net premiums in force of Mutuelles du Mans Réassurance were FrF 1.37 billion, including property (facultative and treaty), life and accident, motor and casualty risks. Le Mans Ré will be based in Le Mans where it will have almost 100 staff and will maintain offices in Toronto, Singapore, Miami and Sydney.
For XL Capital, the advantage of the new company is that its reinsurance subsidiary XL Mid Ocean Re will have immediate access to continental Europe where it has had only a limited presence until now. For MMA, the capital boost and contribution of technical support from XL Mid Ocean Re will considerably strengthen its ability to achieve its aim to become a major European reinsurer over the next five years.
Alexis Ruset summarises developments in the French market in 1998 from the annual report of L'Association des Réassureurs Français and looks to the future.
The trend toward concentration through mergers and acquisitions during recent years has taken place on a global scale in reinsurance, as in insurance and broking.
As a result, the five largest reinsurance groups today control more than 38% of the world market, compared to 21% in 1990.
In five years, the total number of reinsurers has fallen from 400 to less than 200. Many countries buy reinsurance but do not accept it.
Paradoxically, however, this increasing concentration has not affected the reinsurance capacity available, which has remained abundant for various reasons. New entrants into the market have directed significant amounts of capital from the banking sector toward reinsurance. Following its rehabilitation, Lloyd's has rapidly regained business. Finally, established reinsurers look to diversify their activities to reduce the volatility of their traditional portfolios.
The concentration of over-capacity in the hands of a reduced number of reinsurers has exacerbated competition in a context of a stagnant, even diminishing, market for reinsurance, as clients, insurers or large corporations, themselves have been involved in a process of concentration which has reduced their need for reinsurance and changes in the nature of business have altered their demand for reinsurance.
The future of the profession depends on whether this imbalance is of an enduring nature - or not.
If it is transitory, the rise in claims activity noted since 1998 could gradually restore some sanity to the market, a victim today of suicidal rate competition in nearly all classes of business. If, on the other hand, the causes of this disequilibrium are structural, then the reinsurance industry will have to effect a radical change, from which it will emerge profoundly different.
It is possible to conceive that there would be no more than two categories of participants. On one side would be an oligopoly formed by the very large reinsurers capable of responding to the requirements of the largest businesses or large insurance groups now being built up. The other players would be specialised reinsurers, who could be small or medium sized but with an expertise in depth in specific areas of business.
How have these changes manifested themselves in the French reinsurance market?
There are today nine active members of the French association of reinsurers or L'Association des Réassureurs Français (ARF). In 1998, they had a turnover of FrF 40.3 billion, which represents 8% of worldwide reinsurance premiums.
Foreign reinsurers are increasingly establishing themselves in France. Last year saw the creation of the professional association of reinsurance in the French market or l'Association Professionnelle des Réassureurs du Marché Français (APREMAF), which creates a lasting dialogue between the French reinsurers in the ARF and foreign reinsurers. APREMAF has as its aim the examination of current problems of common interest to all reinsurers taking part in the French market. This initiative, which still strictly observes the law on competition, is sufficiently rare in the world of reinsurance to be emphasised here.
Clearly, reinsurance in France has not escaped the global trends in the industry. Turnover was flat in 1998. Technical results overall were negative after three consecutive years of profit. Average profitability fell, both in relation to shareholders' equity and in relation to net premiums, while remaining at high levels (respectively 9.4% and 8.3%).
To confront both international competition and the resurgence of claims activity since 1998, French reinsurers have substantial reserves, which represent about 300% of net premiums, and a comfortable solvency margin which exceeds, on average, 80% of those same premiums.
Above all, French reinsurers are looking toward the future and diversifying their activities in terms of marketing and of new products. Thus, the first French securitisation of natural catastrophe risk has now been successfully concluded. The main French reinsurers today have specialist teams available in the areas which are known as alternative risk transfer (ART) or new markets. They have adapted their organisations to respond to the developments in the market and to their clients' requirements. The supply of reinsurance today needs to be more sensitive, more flexible and more innovative because, more than ever, imagination must be linked to expertise.
However, the French authorities still need to remove a number of obstacles which constitute serious handicaps for French reinsurers to compete successfully internationally in the current, competitive conditions. In particular, the introduction of formal supervision and control of reinsurance in France would facilitate the expansion of French reinsurers overseas and certain tax measures which are particularly penal in comparison to foreign competition need to be removed.For the rest, French reinsurers have given themselves the means to confront the challenges of the future, and it is a task in which the participants in the market join with enthusiasm and determination.Alexis Ruset is the president of the L'Association des Réassureurs Français and chairman and ceo of Sorema.