How global is reinsurance really? Sean Mooney looks at how the industry scores against the Stanford School of Business' key criteria for successful global businesses.

Given its origins in marine insurance, reinsurance has always had a trans-national character. In the US, 53% of reinsurance premiums flow overseas. Close to 80% of Lloyd's business is from outside the UK.

Given the industry's international focus in centuries past, it is worthwhile asking whether it is building the capabilities that will continue its leadership into the coming decades. In an effort to gauge this preparedness there are a number of the key characteristics of global businesses to consider. Those are mainly based on the global management programme at the Stanford School of Business.

A global mindset involves a view of the world in global terms. The global business environment is seen as a whole, not as a sum of its parts. A global mindset is a way of thinking rather than behaving - it is a strong desire to want to get out and understand the world. It's recognising that we don't have all the answers and demands a willingness to listen and to team up with strong partners.

Most observers would probably agree that the reinsurance industry scores relatively high on this criterion. The leaders of the industry in the UK and Continental Europe can be expected to maintain the global perspective that has distinguished their business orientation for more than a century. This mindset is less obvious among US reinsurers. This is partly due to the fact that the United States is large enough and diversified enough to support fully domestic reinsurers. However, with the increasing possibility of mega-catastrophes in the US, lack of geographical diversification could become a competitive weakness.

The shift to Asia

Within a few decades, assuming the continuation of current trends, three of the four largest economies in the world will be in Asia. This move east in the world's economic centre of gravity, with Asia already accounting for over 60% of the world's population, will have a profound impact on many businesses. The reinsurance industry has not been slow to recognise this shift, but given the increasing size and volatility of Asian markets, more attention may be warranted.

There are a number of issues of interest from a risk management standpoint. Efforts by China and other Asian governments to abide by international conventions and bilateral agreements regarding the protection of intellectual property rights appear to be meeting with some success, but the global business community expects more. This exposure, involving losses estimated up to $250bn annually, needs to be addressed.

Asia, arguably the world's most intense user of advanced information technology, may also be the most vulnerable to cyber attacks involving security breaches. The world received a wake-up call on how extensive the damage from such attacks can be last May when the first-ever assault on a country's internet, launched by unknown parties, clogged up many elements of Estonia's wireless network and effectively shut down the nation's economy.

Product quality, lurking in the shadows for some time, has recently exploded with damaging consequences for affected exporters, importers and global firms that outsource production to low-cost offshore suppliers. Within the past few months, following several incidents involving food imports, there are calls for tighter regulation of all types of imported products, including perishables.

“Within a few decades, three of the four largest economies in the world will be in Asia

So far, government attention has focused on Asian imports, but there is reason to believe that tighter import controls are coming for everyone involved in global business. This exposes both importers and exporters to new risks that insurers can help to manage.

From a reinsurance perspective, these three areas of intellectual property, cyber security and product quality all may lead to potential catastrophe losses in both the property and liability arenas, implying the need to spread such exposures through the global reinsurance industry.

Barriers to trade in services, particularly in China and India, while receding, also command attention. As these restrictions are lifted, new profit opportunities are emerging for a range of global businesses, most certainly including pioneering insurers and reinsurers which are prepared to seek out new business opportunities in this fast-growing part of the world.

In looking to future growth in Asia, an open question is whether and where we will see the emergence of a "Bermuda of the East". Such a regime would need a low tax system, a respected system of jurisprudence and an industry-friendly regulatory environment. There are few current candidates that satisfy all of these criteria.

Attitudes toward risk vary across the world. The Chinese are more comfortable with risk, the Japanese are relatively conservative. European nationals prefer generous social safety nets, Americans favour more individual responsibility. Reinsurers recognise such differences. Indeed, the industry itself has developed many specialties, so that customised solutions can be developed to address particular needs.

Investors in people

While multinational corporations recognise the opportunities posed by rapid growth in emerging economies, many struggle with taking full advantage of these developments. They contend with issues, such as location of manufacture, staffing of management positions and quality control issues. Operations also need to be scaleable in order to take advantage of rapid growth. Reinsurers face variations of these issues. On the positive side, they devote a considerable amount of resources to training staff, thus developing a cadre of knowledgeable, future managers.

Smaller economies pose challenges to global businesses as they do not have the scale to justify local delivery and/or manufacture. From an insurance perspective, smaller developing economies, often island nations, also tend to be subject to natural disasters such as earthquakes, floods and tropical storms.

A key characteristic of these economies is the role played by international aid and finance agencies. Initiatives in this area make frequent use of public-private partnerships, thus providing opportunities for global business. The World Bank has been an innovative leader in promoting insurance programmes as an effective means of addressing the financial consequences of natural disasters.

“Perhaps the biggest threat to reinsurers is not competence, but complacency

Reinsurers have opportunities to partner with governments in smaller economies and with international aid agencies to develop quality and secure insurance programmes. The first-ever multi-country catastrophe pool for the Caribbean is one such example. The World Bank assisted in setting up and raising sponsorship for the Caribbean Catastrophe Risk Insurance Facility in June 2007, with Munich Re as lead reinsurer.

Lagging behind

The very concept of a global business is based on technology. This is particularly true of an information business, like reinsurance. With email, fax and phone, location is becoming an irrelevancy.

On the technology front, it is probably fair to say that reinsurance is lagging behind other financial service industries. There is still a lot of paper being consumed in the normal transaction of business. Further, the product is not packaged for global marketing, like stocks and bonds.

Successful business transactions are greatly dependent on trust between the parties. Promises on the quality and timing of the delivery of services cannot be reduced to contract language. Conditions change and purchasers need to feel that the seller will accommodate these developments.

In many countries, trust is bound up with culture. Some societies emphasise family as an integral part of a trusting relationship. Other societies place a trust premium on tribal, ethnic or religious characteristics. In this context, a foreigner normally has little basis to be considered trustworthy. Trust must therefore be earned, and this almost always demands frequent person-to-person interactions over a long period. Reinsurers have long had local offices throughout the world to foster trustworthy relationships.

While there are some deficiencies in the reinsurance industry as a global business, overall the industry appears capable of meeting the new challenges of the global economy in the 21st Century. Perhaps the biggest threat is not competence, but complacency.

Having had an international focus for so long, industry leaders may be slow to recognise new challenges, unknown in the 20th Century. To avoid this problem, it would be helpful if reinsurers adopt another mantra from leading edge strategists, namely "change from the outside in". Such a philosophy serves to keep the focus external, and greatly reduces the chances of being left behind.

Sean Mooney is chief economist at Guy Carpenter.