Swiss insurers were slammed December 26 and 27 last year when the storm Martin blew through the country's mountains and valleys causing some $117 million in claims divided almost equally between damage to buildings, contents, and motor vehicles. It was the most serious windstorm to hit Switzerland in living memory. In areas of Switzerland and southern Germany the storm destroyed 15 times the amount of lumber normally harvested in a full year. In France alone, the storms wiped out 90 million cubic meters of wood.
However, the year end storms were not the only catastrophes to pummel Swiss insurers in 1999. The Swiss Insurance Association reported that the avalanches in February and the floods in May, combined with the December storm, “put quite a dent in the technical account of the property insurers.” The association also pointed to “the continuing above-average increases in health care costs and the generally increased incidence of loss” as additional factors negatively impacting the insurance industry.
So, how are these losses affecting Swiss and neighboring European reinsurance markets? The immediate impact was less than might be expected because a substantial number of renewals had been contracted before the storm hit. But as we move through year 2000 reinsurance prices are bound to trend upward.
Retrocessional protection is becoming increasingly expensive. This will eventually translate into higher prices for ceding insurers. It boils down to supply and demand. If reinsurers have to pay more for retro coverage, they will tend to require more restrictive terms and conditions plus higher prices to provide primary insurers the coverage they need.
Rate increases certainly will flow through to the primary markets. Insurance company margins have been extremely thin. Stock market volatility has reduced the investment income cushion. Shareholders are demanding improved results. The storms simply added to other forces leading toward harder insurance and reinsurance markets. This became apparent as early as last year's Reinsurance Rendezvous in Monte Carlo where the main topic was poor underwriting results in the first six months of 1999. Many reinsurers said they were no longer prepared to accept soft market conditions, and the 2000 renewal campaign saw a long awaited stabilisation in rates.
For example, German reinsurer, ERC Frankona reported that a portfolio review identified about 1,000 clients where contracts need to be revised. A board member said the company is no longer willing to accept inadequate reinsurance prices. As a global market, reinsurance is affected by geographically unrelated events. Earthquakes in Turkey and Taiwan, along with Hurricanes Floyd and Irene in the United States contributed to a major catastrophe year that was compounded by the December storms sweeping over Europe.
End result - higher prices and more restrictive reinsurance terms and conditions for the next couple of years. Swiss insurers will pay more for reinsurance protection but with the strong economy in Switzerland, they should be able to recover these costs through higher prices for primary insurance. We do not expect Swiss, German, and French regions hard hit by the December storms to suffer the capacity shortages that rocked Florida after Hurricane Andrew.
The worldwide trend of business consolidation also is affecting European reinsurers. We expect more mergers and acquisitions over the next few years. Lack of affordable retrocessional capacity is encouraging this trend. Companies need a greater base of capital to write in today's markets where bigger is better.
Changes in demand
As the market hardens, we find there is growing demand for specialised products. In a soft market, ceding companies tend to favour conventional products. However, as prices go up they begin to look for customised solutions to particular problems.
An example is our technical result and investment portfolio (TRIP) policy, which we developed after an insurance company expressed interest in protecting not only its insurance book of business but also its investment portfolio.
The significant feature of TRIP is that the triggers, although clearly defined in the contract, are inter-linked, and it is irrelevant how much each trigger contributes to the result. Unlike typical multiple-trigger programs in which two events such as a natural catastrophe exceeding $500 million and a drop in the S & P 500 index below 900 have to occur in the same year before the insurer can make a recovery, TRIP pays if the combined result breaches a certain threshold. U.S. RE - Europe has placed TRIP treaties to a substantial number of reinsurers, and interest is escalating in today's market.
Insurers in Switzerland, Germany, and across the European Union face common problems. All have suffered from the long running soft market. The storms that laid bare Swiss forests devastated France and much of Northern Europe as well. Availability of adequate reinsurance to cover those sudden, catastrophic events that cannot be factored into normal actuarial tables is vital to the strength and stability of European insurance markets. We anticipate a gradual return over the next year to more realistic pricing at all levels.
According to the Swiss Insurance Association: “For the first time in 60 years premium revenues of the private insurance industry shrank in 1999.” Although there was a razor thin increase in non-life premium volume, the soft market made rate increases difficult to achieve. Life insurance premiums dropped sharply as the result of a stamp duty on single premium life policies introduced in 1998.
However, the outlook for the Swiss insurance market has brightened considerably as we enter the new millennium. The vibrant economy in Switzerland can absorb moderate rate increases without difficulty. Looking across the border to Germany, we see a dramatic recovery taking place from the weak economy that plagued the country following unification. All this bodes well for a stable and moderately growing insurance sector.
Switzerland provides an ideal location for businesses looking to expand operations throughout the increasingly dynamic European community. We established the new headquarters for U.S. RE - Europe in Basel, because Switzerland is a world leader in the financial services and insurance industries.