Tomas Ljungqvist and Christen Pehrson review developments in Scandinavia.

The last five years have been very eventful in the Nordic market. During this time, we have seen consolidation among insurers, mergers between insurance companies and banks and international capital entering the market.

The consolidation has been most apparent in the Swedish market. Länsförsäkringar and Wasa merged to create the largest non-life group in Sweden. Skandia decided to join forces with the old rival Storebrand and Pohjola under the name “if...”. This group will form the largest non-life operation in the Nordic area and is looking for a partner in Denmark.

International insurance groups have driven part of the consolidation. The Danish company Codan, owned by Royal & SunAlliance acquired Trygg Hansa. The year before, Zurich bought the large industrial division of Trygg Hansa and formed the largest industrial insurer in Sweden. Other examples are Hannover Re's acquisition of Skandia International and Zurich's purchase of Protector in Norway.

The Swedish companies are repositioning themselves. Folksam, which has been focused on personal lines insurance and small commercial risks, just recently bought the industrial and commercial portfolio of CGU and of Salus Ansvar. Another example is the small Swedish insurer Svenska Brand that bought the commercial and industrial portfolio of UAP in Sweden.

Other companies are going the opposite way, Atlantica will focus on personal lines insurance and on small commercial enterprises. Its portfolio of marine and industrial insurance is now up for sale. Atlantica is trying to explore the possibilities with new information technology and internet as its main distribution channel. Others are following but the internet is not yet an important source of distribution of insurance in the Nordic area.

Insurance companies and banks are coming closer in some areas. In Denmark Unibank bought Tryg Baltica Insurance to create Unidanmark, a leading financial services group in Denmark. The group will offer all types of financial services to corporate and retail customers within banking, non-life and life insurance, asset management, investment banking and mortgage banking. The largest mutual insurance company in Norway, Gjensidige, and the bank, Sparbank Nor, joined forces last year to create Gjensidige Nor, another financial supermarket for private and commercial customers.

The Swedish companies do not have the same strong belief of synergies when banks and insurance companies merge. The Swedish bank SEB bought Trygg-Hansa in 1998 but after a year sold the remaining non-life operation to Danish Codan.

New challenges for the reinsurance industry
What effects have all of these changes on reinsurance? Insurance groups are becoming larger and are thus requesting more sophisticated services from the reinsurance industry. Competition puts stronger pressure on effective use of capital. The reinsurance industry, therefore, has to adapt to provide the advice that is requested and to fight off increasing competition from accounting firms, investment banks and actuarial and financial management consulting firms. New techniques have also been developed better to identify and quantify different risks that the insurance industry is facing. Historically, the reinsurance industry has been very focused on the management of traditional underwriting risks, whereas the other major source of risk for an insurance company, the investment risk, has been dealt with in isolation by investment managers.

Today, the whole spectra of risks confronting an insurance company is taken into consideration in the company's strategic planning. This includes underwriting, investment, currency and pure business risks (such as losing a solvency certain rating, for example). The objectives of the new techniques that have been developed are to quantify these different risks in a dynamic environment and find the optimal solution for the management of those risks. The determining factor is the company's financial objectives and the impact that different risk management strategies have on those key figures or ratios.

Catastrophe exposure
Another example of the demand for more sophisticated service is demand for catastrophe modelling. Models have been developed to cover a large part of the developed world, but no models cover the Scandinavian region, either in respect of large European storms and local storms affecting only the region.

One reason for the late development could be the comparably low catastrophe exposure in the Nordic area. The region is not densely populated and the economic concentration in areas with exposure is low. The main catastrophe exposures in Scandinavia are winter windstorms and floods. Earthquake is not considered to be important. Iceland is exposed to volcanic eruption and avalanche. Landslide has occurred but caused only small economic losses.Norway and Denmark are considered to be the most exposed of the Nordic countries for wind, while Finland is considered to have the lowest exposure from this peril. Storms that develop over the Atlantic could sweep through Denmark and the southern part of Sweden or hit Norway's west coast. The flood exposure is mainly in the spring from melting snow. Norway was severely affected by flood in 1995, causing a market loss of almost NOK 1 billion.

The property catastrophe business is a very important part of Guy Carpenter's Nordic account and we have, therefore, financed the development of a wind model for Scandinavia to include Norway, Denmark and Sweden by leading modelling firm, EQECAT. In order to build a model of the highest standard, EQECAT had the opportunity to make use of Guy Carpenter's local expertise but more importantly to benefit of data provided by our clients in the region.

Catastrophe reinsurance in Scandinavia
The Scandinavian market for catastrophe reinsurance has experienced significant price reductions over the last years due to the lack of catastrophes and over-capacity in the market. The following graphs show the development of the average programme rate on line (ROL) or premium to limit during the last six years.As can be seen from these graphs the average rate on line and top layer rate on line has decreased by 15-20% per annum since 1994. There has been a slight increase in the limit purchased by the companies.

This study only represents the core reinsurance programmes of the peer group. In addition to these core programmes, the Nordic companies have been rather extensive buyers of underlying opportunistic reinsurances, purchases that have been primarily price driven.

The capacity for Nordic catastrophe business shows no signs of reduction although it is anticipated that the price reductions are levelling out. One of the important factors in this regard is the fact that many of the companies in the area have bound their programmes on a two or three year basis, and there are only a limited number of programmes due for renewal at the coming year end.

Going forward
Accurate predictions of the future development of the Nordic market are, of course, difficult, but there are some fairly strong trends that we believe will continue.• Structural changes in the Nordic insurance industry.
We think that the Nordic market is far from being finally restructured. The consolidation and restructuring will continue and the few true Nordic groups we see today are still fairly small in a European context.

• Increased demand for service and security.
The development of new risk management techniques and increased values at risk have made it more difficult for smaller and medium sized reinsurance companies and reinsurance brokers to be competitive. It is more costly than ever to produce the services required by the insurance industry and only those that can deploy sufficient resources at their client's disposal will prosper.

• Further reduction in reinsurance premium.
The consolidation and increased financial strength of the large Nordic insurance and banking groups will further reduce the volume of premium ceded to the reinsurance market under traditional reinsurance arrangements.

Tomas Ljungqvist is managing director of Guy Carpenter, Stockholm, and Christer Pehrson is senior vice president. Tel: +46 8 679 8888.