In the second of a three-part series to celebrate its 150th anniversary, Swiss Re tells GR how a series of catastrophes in the 20th century highlighted the importance of seeking well-capitalised counterparties
The first decades of the 20th century were marked by growth in both international exposures and single large risks – demonstrated by the Spanish flu epidemic in 1918, which led to a CHF1m ($1m) loss for Swiss Re, and the sinking of the Titanic in 1912, also insured by Swiss Re.
However, it was the catastrophic 1906 San Francisco earthquake that was to be the (re)insurance industry’s wake-up call. The earthquake and subsequent fire that swept through San Francisco was a market-changing event. The extent of the damage made insurers rethink the potential size of losses, as well as the importance of seeking well-capitalised counterparties.
Within three years of the quake, San Francisco had been largely rebuilt thanks to payments made by the insurance and reinsurance industry. The majority of claims were paid by foreign companies, demonstrating just how globalised the industry had already become.
For Swiss Re, the earthquake generated the biggest single loss as a percentage of net premiums in the company’s history, but reinforced Swiss Re’s reputation as a financially secure and reliable counterparty in the US and the UK where the reinsurer honoured its contracts to cedants.
Global market access
Above all else, the earthquake highlighted the need for further geographical and product diversification, leading Swiss Re to make a number of acquisitions.
Acquisitions were to feature early on in Swiss Re’s history, and continue well into modern times. In addition to helping spread risk internationally, acquisitions give access to new business, particularly where strong relationships between local insurers and reinsurers make it difficult to grow.
Early acquisitions saw Swiss Re gain footholds in the all-important UK and German markets through stakes in the Mercantile and General Insurance Company in 1915 and Bayerische Rückversicherung of Munich in 1924.
The 1929 US stock market crash and the subsequent Great Depression showed (re)insurers for the first time that they were exposed to significant risks on the asset side of the balance sheet.
The crash led to write downs of assets at Swiss Re amounting to almost CHF26m, although the company was saved by its accumulation of hidden reserves – some CHF30m were taken from these reserves in 1931 to cover record losses. However, Swiss Re learnt valuable lessons, and the crisis marked the birth of asset liability management at Swiss Re, an important risk management tool that continues to be used by insurers today.
Redrawing the map
While German and Russian reinsurers were expelled from international business around the time of the two world wars, Swiss Re was able to capture a market-leading position in the US. However, the radically different world that would emerge after the second world war constrained reinsurers’ ability to spread risk.
A number of markets were now off limits – with those in Central and Eastern Europe slipping behind the Iron Curtain while others, such as Brazil and India, became state owned. At the same time, other markets were enjoying a boom in consumer spending, leading to higher concentrations of risk in markets like the US and Europe.
The technology boom and growing concentration of risk in mature markets after the second world war led to a growing demand for risk management, as well as greater expertise from insurers and their reinsurers. In response, Swiss Re looked to share its risk expertise through training and communication, a key part of the reinsurer’s business culture and brand ever since.
It opened the Swiss Insurance Training Centre (SITC) in 1960 to provide technical training, particularly to insurers in emerging markets. Swiss Re’s Sigma unit began publishing its trade mark economic research in 1968, and the unit continues to generate some of the most valued data and analysis available on the insurance market.
Part three will be available on GR next week and will focus on the work of Swiss Re in the modern era of reinsurance, market consolidation and expansion, and what role the industry played in the aftermath of the September 11 terrorist attacks.
Part one: The evolution of global risk, is available here.