For the Swiss market, for the moment, it seems there is no place to go but up. The question is, how long can it continue, asks Lynn MacRitchie.
At the beginning of May, Swiss Re and the Zurich Group, Switzerland's top two (re)insurers, announced net profits up by 45% to SwFr 2.12 billion ($1.42 billion) and 37% to SwFr 1.79 billion respectively. For the first time, Zurich has split out the results of its four core divisions, reporting pre-tax profits for non-life up 78% to SwFr 1.86 billion, for life up 26% to SwFr 543 million and for reinsurance up 88% to SwFr 286 million. Both results include the effects of large scale acquisitions, Swiss Re of Mercantile and General in the UK and Unione Italiana di Riassicurazione, Zurich of the US money manager Scudder Stevens & Clark.
These two sets of results exemplify the present situation in the Swiss market. While competition in domestic business and international reinsurance keeps rates down, a combination of a soaring stock market and no major losses has led to large profits. Meanwhile, companies continue to achieve expansion by acquisition. For the Swiss market, for the moment, it seems there is no place to go but up. The question is, how long can it continue?
Albin Reichmuth, director and ceo, Trans Re Zurich, comments that the trends noted in the Swiss market last year had not changed but intensified. Competition, mainly concentrated in the motor and commercial lines, remains tough and rates are weak. Nothing has happened that would allow rates to go up a bit, he says, and one loss or even a series of losses would not do much. "One or two losses will not cure a miserable situation. It would need a series of large losses with drastic reassessment of the rating situation in many classes."
He believes that the market will have to correct itself. At the moment, market share is always in people's minds, and although they know that rates are not correct, he says, direct insurers writing at low rates are still able to get protection. For the moment, over-capacity in reinsurance allows this to happen.
The process of consolidation in the market over a number of years took a further step when companies acquired by Winterthur or Zurich, which at first continued to write under their own names, were fully consolidated into the larger players. A further stage, now underway, is the transformation of the larger companies into huge, multi-financial organisations. "It is difficult to say whether these will be successful or not," Mr Reichmuth says. "The man in the street might not like to find himself doing business with a gigantic financial institution rather than a company that has been around for 200 years and in which he is a known entity, while a businessman would see the company's strong financial backing as positive."
Growth is difficult
The issue of growth continues to be a difficult one for the Swiss market, which, with the highest premium per capita in the world after Japan, is well known to be saturated. Unless there is some move towards privatisation of pension provision over the next 10 or 20 years, it is difficult to see how this could change. General economic growth rates have been around one point for the past couple of years, and this, too, is unlikely to change.
In reinsurance over the last two years, the market has tried to generate growth by acquisition, with larger players buying up the smaller ones to get access to good quality business and market share. "Life has become a little poorer with the smaller players disappearing," Mr Reichmuth observes. Rates are still very soft, and the absence of large losses in 1997 has not helped. Now that companies have even more capital, there is even less chance of a turn in the market which continues, he says, "much the same as last year, in a state of dormancy, of suspended animation."
Henry Atzenweiler, head of marketing, non-life, Winterthur Re, says that the concentration in reinsurance business, which has continued with the amalgamation of Union Re into Swiss Re, presents opportunities to others. Ceding companies, faced with an ever diminishing choice of mega-reinsurers, might decide "not to put all their eggs in one basket. We offer another option for the customer. There is still a place for the less than mega-size."
Reinsurers are offsetting increasing retentions in the developed markets of Western Europe and North America with business from Asia, Latin America and Eastern Europe. Meanwhile, rates continue to be soft. "In many areas, they are ridiculous," Mr Atzenweiler says. "We have had to reduce lines in some areas because we refuse to write increased amounts of business to maintain the same premium level at half the rates. We have moved out of certain treaties as a result.
"Only a series of big losses such as in 1987 or 1992 would make it better or an investment crash or just that the basic business remains so under-rated that profits disappear. We can live with the slim rates so far, but for how much longer? But reinsurance is the free market economy at its best (or at its worst) - most of us made good money over the last two or three years."
Meanwhile, the integration of Credit Suisse is "making progress," he says. "We were at the beginning of a trend which more and more seem to be following."
A mature market
Trevor Petch, insurance analyst, Robert Fleming Securities in London, notes that the Swiss market is "very mature" and has been so for a very long time. The saturation of the domestic market had made it very competitive and also ensured that Swiss insurers write considerable business abroad.
At home, although the Swiss are well known to spend more on life insurance than anyone else in Europe, most of the apparent business growth recently is due to the sale of single premium savings products. A tax on these products has been passed but has yet to be introduced; its shadow hangs over this particular market, which is written at very low margins. In these circumstances, it takes an optimist - although there are some, according to Mr Petch - to believe that significant additional volumes of life business can be expected from the Swiss public buying if recent, historically low interest rates persist.
In non-life, the market has certain peculiarities. In two cantons, for example, house contents business is written by cantonal monopolies and in all 14 cantons, they write all fire business. The Swiss Constitutional Court has just ruled that this may continue, arguing that it is justified because it leads to cheaper and better insurance cover. At the same time, fierce competition after deregulation has led to a shrinking in total non-life premium income for the first time since just after the war. A new competitive force is telephone selling of insurance, now undertaken by all the big companies.
It is as yet too soon to say how the merger of Credit Suisse and Winterthur will work out. For the moment, their combination in one holding company has achieved only such benefit as they had already secured by their earlier co-operation agreements. The demutualisation of Swiss Life in June last year meant that 80% of the population of Switzerland directly or indirectly were given shares in Swiss Life, which is now planning to expand further internationally, for example by bidding for GAN.
The merger of Swiss Bank Corporation (SBC) and Union Bank of Switzerland (UBS) has just been approved, leading to a few questions about bank/insurer relationships. SBC has insurance distribution agreements with Zurich, and UBS owns 25% of Swiss Life: nobody knows as yet what will come of all this.
Zurich, of course, now has a mega-profile. The completion of the acquisition of Scudder, Stevens & Clark in December has made it a global scale international asset manager, and it is also in the process of merging with BAT Financial Services. On a smaller scale, Helvetia Patria has just made an investment in Alte Leipziger's (mostly central and eastern) European operations, and Zurich has just bought Baltic States from Trygg Hansa. Both have an Asian presence but not on a large enough scale so that the present Asian crisis represents any threat.
In general, the Swiss market is operating "in an atmosphere of constant consolidation and takeover speculation," Mr Petch says. "It all looks fine when the investment returns are good and there are no big losses, but it cannot go on like this."
Lynn MacRitchie is a writer and regular contributor to Global Reinsurance.