Walker Rainey explains how one insurance company in Dublin devised and implemented its strategy for European economic and monetary union and highlights some of the early benefits.
Earlier this year, most of Western Europe undertook one of the economic milestones of the 20th century by adopting one currency, the euro, to replace eventually 11 national currencies in Europe, several of which have been benchmarks in the 24 hour global marketplace. However, it is only the first in a series of steps designed to lead to overall European economic integration.
On 1 January this year, 11 European currencies were irrevocably fixed against the euro. Since then it has been the euro that is trading in the global currency markets and the conversion rates for the 11 currencies against each other are relative to their base rate to the euro. National notes and coins will remain in circulation until 1 July 2002, after which all monetary transactions will be in euro notes and coins. The transition period is to allow a controlled changeover process for member countries and give people the opportunity to get comfortable with the new currency.
During the last 18 months, our company XL Europe Insurance (XLE), has been analysing the changes we would have to make to be both compliant and ready. A cross functional team, set up in June 1997, has formulated and implemented a strategy of “being a leader in making the transition to European monetary union and positioning the company for new opportunities resulting from the introduction of a single currency.”
We are convinced that the advent of the euro will have far reaching consequences for many companies and will fundamentally redefine the marketplace in which they operate. Companies must, therefore, refocus on their general business strategy.
There is no doubt that with the introduction of the euro, the potential for cross border insurance in the EU will increase with the eurozone the third largest market for insurance with approximately 25% of world premiums. A re-organisation at XLE early in 1998 led to the creation of a dedicated European customer business unit to target new markets and customer segments in the eurozone and take advantage of price transparency across the EU.
• The euro 11 comprises Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
• The euro 11 economy will account for just under 29% of GDP in the OECD. This is approximately double the size of the Japanese economy and about 8% smaller than the US economy. If the remaining EU economies were to create a euro 15, the economy would be equal in size to the US economy.
Briefly? The IT problem
Like year 2000, we quickly realised that this was not solely an IT issue. The advent of a single currency has long term operational implications affecting competitiveness, financial and treasury management and human resources.
From purely an IT perspective, the euro coincided with year 2000 with many informed sources claiming that the introduction of the euro is much more complex than year 2000 or, indeed, decimalisation. The introduction of the euro being first on the timetable with 1 January 1999 the date of real time trading for the euro gave it a slight priority in the competition for resources.
Operationally, our audit highlighted the software and hardware upgrades needed, identified new software purchases to ensure compliance and examined electronic commerce gateways for both banking and trading. A second dimension for IT was to ensure a seamless conversion of data so that our systems supported triangulation and six significant figures. The self certification pack from the Business and Accounting Software Developers Association (BASDA) proved a useful compliance tool.
Ironically, one of the biggest IT concerns was the euro symbol and where it would fit on the keyboard! A somewhat belated response from manufacturers has given it a permanent place (on the number 4 key) but not without some bugs, depending on what software package is in use.
The client perspective
A primary goal in preparing for the euro has been to create competitive advantage in being ready (both from an operational and strategic perspective) for the euro and to communicate that to our clients and brokers. Indeed, several of our large continental European clients had informed us during the last 24 months that they expected all suppliers and customers to trade through the Euro after 1 January 1999.
Although not a legal requirement, we decided from an early stage to quote and bind policies in any of the 11 currencies or in the euro or both from that date. A few of our 1999 renewals have already been quoted in euros and we expect this trend to continue over the transition period.
For our clients the issue of continuity of contracts was again identified early on as an area which could produce major barriers to widespread use of the euro. Fortunately, two EU resolutions established the legal framework for use of the euro. The most important is Article 235, which deals with contract continuity, the replacement of the ecu with the euro on a one-to-one basis and the technical rules for the conversion rates, including rounding. Given our policies are governed by the laws of an EU country (or New York, where the statute mirrors the EU regulations), contract continuity is assured for our clients.
The complexity of the euro project emphasises the importance of risk management. In addition to the challenges of the conversion weekend, organisational controls and risk management procedures will have to be revisited for the transition period. The possibility of losses for the larger and more integrated financial institutions that will inevitably result from mergers and acquisitions activity in the eurozone is significant and real. Indeed, a recent survey identified the euro as the number one concern for an increase in fraud. Outside directors may also want to reconsider their position in light of a company's preparedness (both from a strategic and an operational perspective) for the introduction of the euro.
From a PR perspective we focused on a customer communication strategy during 1998.
• We included several euro articles in publications distributed to our brokers and covered the topic in several trade magazines.
• During 1998, we scheduled economic and monetary union as a presentation topic at our three broker/client conferences.
• Recently we undertook a promotion on the euro to all our clients and brokers to reiterate our operational readiness.
A financial perspective
Corporate financial management is undoubtedly one of the key beneficiaries of the euro. Everything from banking partners, consolidation of foreign currency accounts and payment systems to currency risk management and investment management had to be reviewed in the new euro environment.
Our banking relationships will focus on those partners who offer true pan-European networks, can deliver the full range of euro products and will pass on the inevitable savings from the introduction of a single currency.
The number of currency accounts will be reduced and eventually replaced by a central euro account. The simplified accounts structure will streamline processing and reduce banking fees.
We plan to take advantage of the major developments in commercial electronic banking in Europe and the opportunity to speed up cross border receipts and payments.
With the dollar as our functional currency, our exposures still have to be managed after the introduction of the euro, although this process has been simplified with 11 potential exposures compressing to one. Our strategic positioning for the new euro marketplace will inevitably bring about changes in our currency risk profile and we will dynamically manage our sterling exposures over the next few years. XL's own product offering for foreign exchange protection may be of interest to many treasurers as they re-evaluate their risk management programmes.
We have worked closely with our investment manager and custodian and many of our bonds have now been redenominated in euros. Given the government bond market will be narrower, we expect many investment managers to focus on corporate bonds and mortgage backed securities for diversification and yield pick-up. The single currency will inevitably also accelerate securitisation in the EU.
We will continue to avail ourselves of a statutory concession and file our statutory financials in dollars, although our regulatory return will be filed in euros in 2001.
During the last 20 months we have analysed our company a thousand different ways in search of euro implications. Certainly, we are compliant in all the basics required for widespread use of the euro. More importantly, we are ready for the opportunities. The euro is already changing the way European business operates and thinks. It is introducing efficiencies, it will promote more intra European trade, there is strong political support for it and the likelihood is that the euro 11 will almost certainly grow over the next five years. Perhaps in 15 years time, it will replace the dollar as the world's reserve currency, just as the dollar did the gold standard 40 years ago.
J. Walker Rainey has been chief financial officer of XL Europe Insurance since its inception in 1990 having previously spent nine years in the insurance industry in Bermuda. Tel +353 1 607 5300; Fax +353 1 607 5333; E-mail: email@example.com; Internet: www.xleurope.com.