Victor H. Blake proffers his opinion on this latest version of the reinsurance game.
As someone who has spent four decades working in insurance and reinsurance - on both sides of the Atlantic - I have been asked to comment on how I perceive the current changes and developments in the industry. Over the years, I have witnessed a massive transformation in almost every aspect of the business - much of it driven by technological innovation.
The pace of change has accelerated dramatically over the past five years. This latest phase in our industry's evolution has been characterised in particular by consolidation, convergence and globalisation. All of these developments are ultimately fuelled by a single common factor: the overriding need, faced by all participants in the market, to compete in the transfer of huge risks - and to do so with maximum cost-efficiency.
The market clearly requires huge amounts of capital to fund the new exposures we are now able to identify, with ever-increasing accuracy, thanks to advanced modelling techniques. But at times - particularly when, as now, stock markets are high and catastrophe losses are low - much of this capital is underutilised.
A temporary surfeit of capital within the industry will inevitably exacerbate prevailing soft market conditions. This is precisely the situation in which we find ourselves today. As the necessity of making this money work harder becomes ever more apparent, we are seeing mergers and acquisitions, globalisation, and convergence between banks and insurers - on an unprecedented scale.
Under such circumstances, one is bound to question how much of the consolidation we are seeing is driven by a sincere belief that big is beautiful and how much simply by the need to deploy underutilised capital resources. How much faith should we have in the idea that size in itself is a positive attribute? This brings us back to the great unanswered question: just how big does an organisation need to be to compete effectively in this latest version of the reinsurance game?
Definitions of size are themselves changing all the time. What was only recently considered big is now medium; medium has become small; and small may soon be obsolete. And a brand new weight division has emerged - behemoth!
The benefits of scale may well be more persuasive when size goes hand in hand with a broader range of products and extended geographical reach. As the rules of the game change, it is certainly hard for a company we might now describe as medium or small to claim to be all things to all people, or to maintain effective representation in every major geographic location.
Those medium-sized companies who now harbour ambitions to become big companies can probably only expect to achieve this through merger and acquisition. The logic of the current market will no doubt encourage many such companies to attempt this. If my analysis is correct, then the present round of mergers and acquisitions probably has some way to go yet.
However, if a time should come when all this frenetic activity finally subsides and we have an opportunity to take stock of the new universe that has emerged, will it be a Land of the Giants that we see? In broad terms, I would anticipate that the answer to this question would be yes - but not exclusively so.
I think it is safe to assume that medium-sized companies will still have a place in the new reinsurance landscape. Indeed I would go further and predict that a (much-reduced) population of "small" companies may continue to find a niche for themselves by offering a highly focused and specialised bespoke service. With the right business strategies in place, there will still be options beyond extinction or assimilation.
How will these companies have survived in the Land of the Giants? There are several factors which I believe will make this phenomenon possible. Most important of these is the customer. The customer will always have a choice, and it is unlikely that customers will ever want to put all their eggs in one basket. Another argument in favour of the continued existence of smaller entities is the nimbleness and entrepreneurial spirit that has sustained the best of them so often before.
There are other factors too that may work in favour of more modestly scaled organisations. Just as the larger players seek to emulate the responsiveness and adaptability of their smaller counterparts, small companies may be able to punch above their weight by forming strategic alliances with larger organisations from which both will benefit.
Subscription markets such as those at Lloyd's and the London Underwriting Centre will continue to have their supporters; and cutting-edge markets such as Bermuda with its regulatory and tax advantages will continue to attract both entrepreneurial specialists and their customers.
One question that inevitably comes up whenever discussing the future of the reinsurance industry is when - or indeed whether - the current soft market will finally come to an end. It has been a longstanding query, and pundit fatigue has well and truly set in now. Certainly, there is little to be gained from anxiously scanning the horizon for a sighting of the friendly shores of a new hard market - and those who see it as a consideration best put aside in favor of dealing pragmatically with the present situation have a sound case to argue.
However, if I were to venture an opinion, I would have to say that in my view the seeds of the next hard market have already been planted, and it is only a matter of time before they germinate. We have already seen the beginnings of a downturn in the stock markets and in interest rates. Red ink is already starting to show through in certain parts of the market, and current projections suggest that it may soon be flowing more freely; expenses will inevitably rise, with little or no top-line growth to offset the increased costs.
So, with two out of three preconditions already in place, and with many industry participants continuing to write at questionably viable rates through the soft market, the stage is set. It may not come in six months, maybe not a year, but sooner or later the balance will begin to shift. A dramatic manifestation of the third component in the equation - a large catastrophe loss, for instance - might jolt the market sufficiently to turn a gradual process into a sudden reaction.
The scale and character of the changes taking place within the industry can at times be both exciting and bewildering. Change can be painful - particularly in the downsizing aftermath of mergers and acquisitions. But without this change the future of our industry would be dangerously uncertain.
For college graduates encountering it for the first time, the reinsurance industry must seem both an intensely stimulating and an extraordinarily challenging environment. The range of skills future industry leaders will be required to master is expanding all the time. In future, role descriptions such as underwriter, broker, actuary and technician will be radically redefined.
Teamwork and integration will be the keys to success in the years ahead. The future prosperity of industry participants at every level will demand not simply paying lip-service to the notion of teamwork - but putting it into practice throughout the organisation - and in every aspect of its operations. As an effective organisational principle, teamwork requires the formation of focused integrated business service units, each comprising all the necessary skills.
Certainly, in the future many of us within the reinsurance industry will find ourselves working within large-scale corporate entities. But equally some will gravitate towards medium-sized companies or to smaller start-up ventures. This reflects the vital continuing importance of entrepreneurial spirit in our business.
Relationships - particularly those between insurer and reinsurer - will also continue to be of fundamental importance to organisations of every size; and the challenge for the bigger players will be to prevent themselves from becoming over-bureaucratic and cumbersome, and losing sight of this. Some will succeed; others will not - and it is this as much as any other factor that will ensure the survival of the smaller specialists. Size matters, of course; but it is performance that counts!
Victor H. Blake, OBE, is chairman and ceo of LaSalle Re, non-executive chairman of CNA Re, and founder chairman of the London Underwriting Centre.