Globalisation has not homogenised the differences between the French and the English, in reinsurance markets - or rugby. Adrian Ballardie discusses what this means in practice.
One of the most obvious differences between the French and London markets is that of culture. British sang froid and “stiff upper lip”contrast with Gallic passion and flair. These differences mirror those evident in the two nations' respective styles of rugby: the exciting, unpredictable, creative and spontaneous open play of the French -versus the relatively dull, relentless, planned “method” play of the English. (The Scots, incidentally, seem to combine the best of both!)The British tradition of “clubishness” fascinates and intrigues the French, who value individualism, and who like to wear their competitive hearts on their sleeves. They sometimes suspect that the London market's tendency to collude is not always to the benefit of the competitive environment. In this, they may very well be right. Of course, London underwriters only collude in matters of a non-competitive nature; don't they?
But, then, what are Europeans to make of London's habit of over-reacting to the shortage of capacity in a hard market and embarking on a spree of exorbitant charging for their services? How did the notorious excess of loss spirals develop - if not for some unhealthy collusion? And what of the (now abandoned) practice of setting up Lloyd's baby syndicates for friends and family'? It would not be hard to add to this list of practices peculiar to London which outsiders might be justified in finding somewhat unusual.
Such idiosyncrasies aside, the age of the London market and its maturity and sophistication have contributed to its continuing strength. The physical concentration of skills necessary to support the activities of insurance and reinsurance has long been an important factor, and continues to be so today. Underwriters - often with their claims staff in the same office - surveyors, loss assessors and adjusters, lawyers, arbitrators, bankers and investors can all be found within a short distance of one another.
Communication between practitioners in London has historically been good, ever since Mr Lloyd's coffee house first became a venue for the conduct of insurance business. The close physical proximity of players in the London market - be it at the boxes in Lloyd's or the concentrated company market capacity at the London Underwriting Centre - greatly facilitates the flow of information, both formally and - more especially- informally.
The London underwriters' tendency to tell competitors they will do one thing, while in practice doing the opposite, is a distinctive cultural feature of the marketplace. A capacity for self-effacement while behaving deviously is culturally alien to most outsiders. The tendency in France is for less evident collusion, and the French reinsurance market certainly lacks the physical proximity of players and London's culture of gossip shared over a pint in the pub.
The results of these processes are, nevertheless, impressive. The London market spawned the major marine insurance market in the world, which still has a pre-eminent position in the global market. The marine insurance clauses developed by the Institute of London Underwriters (ILU) set a world standard and embody much of what has been best in London market insurance and reinsurance. The Non-Marine Underwriters' Association (NMA) for Lloyd's, and the company market associations, starting with the ROA, subsequently LIRMA, and now the IUA have continued this tradition. A degree of collusion is clearly required to produce basic standard products, and in this area London stole a march on the rest of the world by getting there first.
They do things differently in France
A common view of the French approach is to characterise it as “underwriting by committee”. This generally means that - although arguably more controlled and more easily audited - the response that results is slower. It lacks the immediacy of the traditional one-to-one broker-insurer negotiation held across the underwriter's desk. I hasten to add that this is not the practise of Axa Re!
London has thrived on its face-to-face trading environment, where deals are thrashed out in a relatively short period of time - the system relying largely on the trust and integrity of the negotiating parties. To some extent this has introduced “win some, lose some” attitudes among brokers and underwriters, with each alternately bestowing and calling upon favours from one another.
The French approach is subtly different. Much emphasis is placed on a purely technical approach - supported in a pragmatic way by the ability of the French reinsurers to allocate reserves not subjected to the same fiscal regime as those of reinsurers incorporated in the United Kingdom. French reinsurers are not subjected to regulation in the way their counterparts in London are. This enables them to take a different view as to how reserves are made and managed. Accordingly, French and other continental reinsurers can take a much more long-term view of their fiscal strategy.
This is particularly important when considering catastrophe reinsurance. By its nature, this is always a difficult area of business to balance. Classic insurance theory relies on the balance of a portfolio of business being based on the law of large numbers. “Get enough discrete risks on to your books, so that the burning cost of losses to that book can be balanced by incoming premiums per annum, and you are in business,” so the theory goes.
However, the nature of natural catastrophes is such that for years there may be none of significance to the reinsurance community, and then one or two massive losses come within a short period of time. Each such loss can often exceed the global value of premium charged for that peril. Reinsurers have to dig into their reserves, and sometimes their capital too, and then hike prices massively to get payback. Under these circumstances, reinsurance suddenly stops looking so much like insurance, and begins to look more like a banking operation - with capital loaned up-front for a small price, and a (variable) rate of interest charged on the payback of the “loan” represented by the reinsurance contract.
Given the UK authorities' fondness for effectively taxing catastrophe reinsurance reserves up-front, continental and other overseas reinsurers gain a fiscal advantage. They can charge lower payback premiums, since they have higher reserves to dip into in times of loss. The more technical approach to pricing which the continental reinsurers are able to take, is not the full extent of their advantage.
The corollary of the technical is the commercial, and in this area, French reinsurers are as sophisticated as their London based and other global competitors. The combination of both elements is essential to the successful and profitable running of a reinsurance company. London has long recognised the need for innovative ways of running profitable catastrophe reinsurance accounts, against the fiscal disadvantage of having this business taxed in the same way as general insurance business.
In a sense, French reinsurers enjoy the best of both worlds: acting as London does in a speedy, decisive, technical, but commercial way - but also benefiting from the relative freedom of a lighter fiscal environment and an absence of regulation. They are nothing if not pragmatic in their approach, and add a certain je ne sais quoi to the reinsurance market.
Adrian Ballardie is ceo, Axa Reinsurance UK plc. Tel: +44 (0) 171 617 4600; fax: +44 (0) 171 617 4670. E-mail: Adrian.BALLARDIE@axa-re.com