Consolidation will continue in the reinsurance industry. Financial deregulation will become a reality in the United States. Feds will play a greater role in the US insurance industry. Phil Zinkewicz interviews Franklin W. Nutter.

The mergers and acquisitions that have been taking place in the worldwide insurance and reinsurance communities have been reported in the press diligently, if not always analytically. A merger between two large firms makes a good news item which, in the dailies, are printed and then often forgotten.

Marsh & McLennan takes over Johnson & Higgins which also now owns CECAR. Gone are Alexander & Alexander, the Minet Group and the Bain Hogg Group, all devoured by AON Corp. In the United States, Aetna Inc. takes over the health operations of New York Life Insurance Co and, in Bermuda, Exel takes over Mid-Ocean. And, of course, there is Citicorp and Travelers, but that development represents several other stories altogether.

That consolidation is taking place in the global insurance community is undeniable. But, is there rhyme and reason that can be applied to the marriages, adoptions and kidnappings that have taken place?

Franklin W. Nutter, president of the Washington, D.C. based Reinsurance Association of America (RAA), believes that reasons for consolidation within the industry abound, but they do not always rhyme, nor should they. Having been president of the RAA since 1991 and general counsel before that, Mr Nutter has spent almost his entire career with both eyes trained on the worldwide reinsurance arena. His observations regarding current developments in that battleground are keen and his arguments for continued consolidation are cogent.

"We start with the fact that general conditions within the reinsurance industry are extraordinarily healthy, based upon capital standards and surplus. The year 1997 was a remarkably good year and the industry is robust in terms of economic performance. Having said that, the dark lining in that silver cloud is that it is a very competitive marketplace, and most analysts believe that the industry will come under exceedingly great pressure to be as successful in 1998. The irony is that the success of the industry has led to increasing competition and the challenge will be to continue the good performance within that competitive environment. Hence the moves towards consolidation," Mr Nutter says.

A different kind of consolidation

The RAA executive says that most analysts and people in the business believe that the pace of consolidation may ease, but that the trend towards consolidation will continue. "We have already seen major mega mergers, but we are more likely to see in the future a different kind of consolidation," he says. "Some smaller companies which are not doing well in the competitive environment and which do not have a significant market presence might seek to leave the business altogether or seek out partnerships with other players who are similarly situated in order to create the size that may be needed to get the type of ratings from independent rating organisations, or the attention from brokers and clients that they need."

In the mega mergers that have already taken place, says Mr Nutter, the reasons have been there but they differ. "Some of the mergers have occurred as companies wanted to establish a global presence. Some US reinsurers have made significant acquisitions in Europe, such as General Re and ERC, in order to establish a true global presence. They are making a dramatic statement about their intentions to be globally recognised in the international marketplace. On the other hand, some companies have made acquisitions to diversify into lines of business that they believe to be strategic issues for them, such as Swiss Re. Other companies have made acquisitions to expand their market presence in the US, and a good example of that would be SCOR's acquisition of AllState Re's book of business."

Therefore, according to Mr Nutter, there does not seem to be a single driving factor behind the acquisitions, unless it is that a number of companies have benefited from a strong capital base and feel that they must do something with the money in order to perform as well next year as they have in the past.

The word "global" is bandied about these days and asked to define what really constitutes "global" operations, Mr Nutter states that the task is not easy. "A reinsurer may be said to have a global presence, because it has a physical presence in emerging markets," he says. "However, a reinsurer that wants to assume business from a foreign marketplace need not have a physical presence, but just a willingness and the ability to assume risks from one of the major hubs. Therefore, some smaller insurers that are not going global in terms of a physical presence may be participating in the London market, for example, where many international risks are presented."

Comments Mr Nutter: "I guess the major distinction I would make is that many companies are international in character by the diversity of the risks they assume, but that there are only a few companies that are global in terms of actual offices in major worldwide markets."

Financial deregulation

Mergers and acquisitions aside, he says that the RAA is actively involved in a number of issues from a policy advocacy standpoint, which he believes are of paramount importance. One is the movement on the part of the federal government, or the lack of movement depending upon one's point of view, towards financial deregulation.

He points out that, in Europe, banks and insurance companies can affiliate as financial and corporate partners, but because of the Glass-Steagall Act, which was passed during the great depression of the 1930s and which many believe to be obsolete, those kinds of affiliations cannot at present exist in the US. "The RAA recognises that there is a synergy which exists between sophisticated financial institutions - banks, insurance companies, reinsurers, etc - and our goal is to see that laws are established or changed to accommodate that synergy."

So far, Congress has failed to pass a financial deregulation law, but many believe that the recently announced merger between Citicorp and Travelers might provide greater impetus to the movement of allowing banks and insurers and reinsurers to mingle. Mr Nutter says that the RAA is in favour of financial deregulation as long as all insurance activities are conducted in a consistent regulatory structure; insurers, banks and securities firms are authorised to affiliate in the most efficient corporate structure possible and appropriate consumer safeguards are implemented.

Alien reinsurers

Another major concern for the RAA is the regulation of alien reinsurers operating in the US. Mr Nutter says that one of the weaknesses of the state system of regulation over insurance and reinsurance is its inability to provide the same level of oversight over alien companies as it does over domestic firms.

"Critics of the state of insurance and reinsurance solvency regulation have long complained that the lack of regulation over alien reinsurers is one of the most important problems calling for action. Alien companies account for a large portion of the US reinsurance market. RAA statistics indicate that in 1995 there were more than 2,000 companies from over 90 jurisdictions which assumed US reinsurance risks or owned reinsurance recoverables to US insurers. Various solutions to this weakness have been proposed, including federal reinsurance regulation, a 'gatekeeper' role for the National Association of Insurance Commissioners (NAIC), interstate compacts and conditions requiring alien companies to waive the protection of their home countries' secrecy laws," says Mr Nutter.

The RAA strongly supports federal regulation of alien reinsurers over the other three approaches because of the widespread international composition of the reinsurance business, and the need to have federal authority over it. Explains Mr Nutter: "The gatekeeper approach gives competing alien reinsurers the advantage of dealing with a single regulator while domestic companies are still subject to 50 different state laws." Nor is RAA in favour of a regulatory role for the NAIC. As for the interstate compacts approach, the RAA feels that as with other interstate compacts, it fails to achieve the degree of uniformity available through a federal approach and it creates an additional layer of regulatory authority.

As for secrecy laws, the RAA believes this should not be a consideration, because the posting of sufficient collateral by alien insurers provides sufficient protection for primary insurers and policyholders. "The philosophy of US credit for reinsurance laws is based on the premise that a reinsurer either submits itself to regulatory authority or posts collateral," says Mr Nutter.

Natural catastrophes

The RAA also sees a role for the federal government in dealing with high financial losses from large scale natural catastrophes. According to Mr Nutter: "Ever since Hugo, Andrew, Iniki and Northridge, insurance experts have been concerned about the effects of a major disaster. That concern has affected the availability of homeowners' insurance in certain areas of the US. The RAA fully supports the creation of a federal role in the management of high level property catastrophe risk. Such a role would protect life and property and ensure that financial recovery would not depend on emergency relief measures, but instead would be the result of a well prepared, actuarially sound insurance. Provisions for hazard mitigation and loss reduction are an essential part of any insurance programme.

"The RAA believes," Mr Nutter continues, "that a federal programme is preferable to action by individual states, where a variety of catastrophe funds and special insurance programmes and rules have been enacted. We believe that states suffer from an inability to spread risks, have limits on capacity because of revenue sources or state budget resources, and provide inadequate protection against insurer insolvency, among other things."

These are some of the areas in which RAA has been active and will remain active. "The reinsurance industry worldwide is changing at a rapid pace and is facing significant challenges," Mr Nutter says. "Mergers and acquisitions will probably continue, financial deregulation will probably become a reality and the industry will have to work with the federal government in certain areas to meet those and other challenges which will come about."

Phil Zinkewicz is an insurance writer based in New York. He is a regular contributor to Global Reinsurance.