Flat demand, deregulation, competitive direct rates, demanding cedants and sweeping corporate changes tell a familiar story in Switzerland, as Adrian Leonard explains.

It could be the description of anywhere: “The Swiss market is experiencing a wave of change,” declares Peter Blumer, the man responsible for local client services at Swiss Re. “Most important is the new major presence of the international companies entering the Swiss insurance sector.”

Ten years ago the Swiss market was isolated and regulated, an unassailable component of the world's most formidable and respected financial services stronghold. If ever it was made known that a Swiss insurer was to become available for sale, another Swiss company would step forward and buy it, rather than break the front line and give a foreign multinational the opportunity. Now all that has changed.

The shift has been most obvious in the reinsurance sector, with Swiss names such as Rhine Re, Winterthur Re, and Veritas Re now in the hands of transatlantic owners. But the trend to foreign ownership is even more apparent on the primary side. According to the Swiss Office for Private Insurance (BPV), 32 of the 164 companies reporting to it in 1998 were foreign affairs. This includes newly authorised specialists such as Guernsey aviation group Polygon Insurance, and London's Euler Trade Indemnity. Other new entrants are more familiar insurers, including Allianz Risk Transfer. It is authorised to write a range of covers from motor to MAT, and forms part of the Allianz Schweiz empire, which includes acquired Swiss insurers Berner and Elvia.

“The penetration of Switzerland by foreign companies is having an impact on our behaviour,” admits Urs Berger, chief executive of the Swiss operations of Baloise Insurance. “New products and service lines are coming into our market from other places, and we have to react to them. Sometimes we lose premiums.”In most cases foreigners are entering the market through acquisition. “The impact is there, but it is not a shock,” Mr Berger says. “If we look at Allianz, with all its Swiss companies, it ranks third in non-life and fifth in life,” Mr Blumer explains. “In February, Generali bought the majority of Secura, which was owned by a Swiss food distributor. It will push Generali into the top league of Swiss insurers.” On the life side especially, he says, the European giants Allianz, Axa and Generali are each capturing a significant market share through acquisition.

Rankings in the Swiss market rarely change considerably. “We do not have big variations from one year to the next, because the big companies have very high shares,” Mr Blumer says. “If you have a company adding to its premium base by 1% or 2% more than its closest competitor, it is not enough to overtake them.”As for the reinsurance of Swiss primary business, a few predictable companies have it stitched up. The Swiss market is one of the traditional, primarily direct markets of the continental reinsurers, so Swiss cedants have little concern about Bermuda, the Far East or, for that matter, Paris. Of total premiums ceded about four francs in 10 go to Swiss Re and the other Swiss-based reinsurers, of which the former will receive well over half. Munich Re and other German companies probably have another 40% or more, again with the giant assuming the lion's share. The remaining 20% is mostly in London, but only specialty and high layer business makes it there.

And while Swiss reinsurers dominate, only Swiss Re (with its subsidiaries) and Zurich Re remain truly Swiss. New Re is a Munich Re operation, Rhine Re is part of Kohlberg Kravis & Roberts, Winterthur Re has gone to Partner Re, and Whitehall Financial owns Veritas Re. Nor are the major Swiss players, who have looked far beyond their borders, immune from the global market malaise. Swiss Re, for example, has announced it is to review the worst 20% of its business, slash catastrophe capacity by one fifth, and reduce its workforce by up to 450. Baloise has restructured, sold its reinsurer and is to focus its international activity on five nations. Meanwhile, both Swiss Re and Zurich have adopted the guise of full service financial operations, with insurance now only one part of a range of financial products on offer. Each is spending a huge amount to advertise its new self-image to the world, along with a number of other global insurers that do not just mean insurance any more, and each is spending massively on acquisition.

In Switzerland, as everywhere, a surfeit of reinsurance capacity is chasing the relatively stagnant Swiss premiums, which has made the market more competitive than most insurers and reinsurers remember. Compounding matters, Swiss business has, on the whole, been profitable, making it even more attractive.

To ensure business stays put, reinsurers are creating new products which they hope will build loyalty. “On the primary side, companies are developing products that blend long tail and short tail cover, so we have explored this on the reinsurance side,” Swiss Re's Mr Blumer says. “This year we will offer a stop loss contract, based on the cedant's combined ratio, which covers both long and short tail risks.”

At Baloise Mr Berger, who reveals his main reinsurance relationships are with Swiss Re, Munich Re and Cologne Re, is laudatory. “There has been a lot of progress recently. They have come up with multi-line covers, which we lacked for years and years, and which will be very important for us.” He also cited assistance in areas such as the development of alternative risk transfer products (ART) - as well as their reinsurance - as an important role of the reinsurers. He is sanguine over competing with a main reinsurer for major risks, especially in the alternative risk transfer area. “They go for the Fortune 1000, but we go for the segment just below, the mid-sized companies.”

Meanwhile, reinsurance covers are being stretched as cedants ask for more. Home-foreign risks in the United States and Canada had typically been excluded from Swiss treaties, but are now likely to be included. Retentions are increasing, and companies are asking for higher treaty limits. Swiss companies have, for the most part, demonstrated a solid and stable financial ledger, which means they do not need proportional reinsurance as a substitute for capital. And the shift away from proportional arrangements to excess of loss continues - with some exceptions. “In my portfolio I have almost everything on an excess of loss basis,” Mr Blumer says, “but the very few proportional treaties I have generate about 25% of premium. They are very, very big.”

However, the Swiss market is not expected to grow. Last year's figures, which boast a 7% overall rise, would be more nearly flat but for the one-off effect of a new tax levy of 2.5% on single premium life business from April 1. It caused income from the class to soar by 27% year on year, and life business overall to grow by more than 10%. Non-life, in contrast, grew less than 1%.

The Swiss economy is expected to post growth of only 1% to 1.5% in 1999, which usually means a similarly sluggish growth in the insurance sector. “GDP growth trends suggest we have reached saturation,” Mr Blumer says. “There is no expectation of growth in non-life business, so all the companies are trying to capture a larger market share.” This, he says, is causing heated competition - building to even aggressive attempts to push competitors out of lines altogether. “Motor has been barbaric, and rates have gone down and down and down.” Nor is he convinced the rate war has yet to see rates bottom out. “We may see the turn in 1999,” he says hopefully. Mr Blumer says that as there is now little flexibility on the cost side, insurers will have to reduce their combined ratios by looking at underwriting. “The situation of the Zurich bourse is deteriorating, which will oblige insurers to go back to their roots and control their business, and to observe their technical results.”

As in so many cases in Europe and elsewhere, deregulation bears some of the blame for the carnage in motor. Tariffs for motor liability were abandoned from 1996, resulting, predictably, in the first ever fall in total motor liability premiums, which has continued ever since. “The individualisation of premiums for motor third party liability posed a challenge for each insurer,” said the Swiss Office for Private Insurance in its 1997 report. Although the supervisor went on to describe the difficulty of setting rates with a limited database, the real challenge lay in the new level of competition introduced. “A heated battle is going on in motor,” Mr Berger says. “The products are commodities, with a low need for consultation.”

The Swiss market is facing other familiar problems. Bancassurance is one. “Life premiums are stable, but insurance companies are losing some market share to banks. It worries us.” For Baloise, a set of affinity market arrangements has paid off, including one with the largest Swiss motoring club. The company is also looking at Web TV and other electronic systems.

The market wide tendency toward higher losses, especially in personal lines liability, is all too familiar. Rising health costs will contribute, especially to motor, personal accident and the non-obligatory private health sector. Nevertheless, the Swiss market delivered a satisfactory technical result in 1998, because it was spared local natural catastrophes and major fires. In that way, at least, it is distinguished from elsewhere.

Adrian Leonard is a freelance insurance writer and regular contributor to Global Reinsurance.