Reinsurance throughout the world

The Anglo-Saxon pattern

The Anglo-Saxon pattern includes the English market, where Lloyd's stands as the most significant stakeholder, the American and the Bermudan markets.

The London market

The London market is a transaction market for large risks and non-life risks. It is estimated that approximately 15% of large industrial and world reinsurance risks flow through the London market.

This market plays a key role in the placement of aviation, marine, energy and reinsurance risks. Alone, it underwrites 40% of worldwide aviation insurance premiums, 60% of oil rigs and 15% of reinsurance premiums worldwide.

The London market is characterized by a dense concentration of stakeholders, the most influential of which is the Lloyd's.

Evolution of the Lloyd's reinsurance activities 2004-2008

The American market

It is the most important market. It generates 51% of insurance premiums worldwide.
The 2008 ranking of the world's top ten reinsurers (according to turnover), includes three American groups: Berkshire Hathaway, Reinsurance Group of America and Transatlantic Re.
Historically, it was during the 1970s that the American investors started showing interest in the reinsurance market through:

• captives
• underwriting agencies, especially in London
• the takeover of companies in different European markets

The American market structure

The American system is different from that in force in European countries.
Each American state has its own insurance commissioner, an independent body in charge of supervising the market. Elected for a defined period, this entity is responsible for the due progress of insurance and reinsurance operations within its own state. The insurance commissioner also defends the interest of the insured.

In an American State, there can be only two kinds of reinsurer:

• admitted reinsurers. They are the reinsurers who did get agreements to operate in a given State. They provide baseline capacity to cover the reinsurance needs of local insurance companies.
• surplus reinsurers. They are non-certified reinsurers in a given state who supply additional surplus to that provided by admitted reinsurers. These reinsurers intervene on the second line.

Constraints of the American market

The American market requires from foreign reinsurers some constraints such as:

• providing reserve by way of a credit letter for the cedant which may recover it when needed
• the federal excise tax, which is non-recoverable. It regards reinsurers whose countries of origin did not conclude conventions with the United states

In addition to other specificities of the American market like for instance:

• the choice of the channel of business acceptance: the reinsurer works either directly or through brokers, but cannot use both channels at the same time.
• considerable exposure to natural catastrophes: storms, hurricanes, fires, earthquakes.
• claim risk which is very substantial in third party liability insurance.

The Bermudan market

Emerging at the beginning of the 1990s, Bermudan reinsurers have, henceforth, become part of the landscape, alongside the traditional reinsurers. Today, they control 9% of the world market.

Traditionally, Bermuda is an important captive market. Attracted by a favorable fiscal legislation (tax-free profits), big American oil groups established their insurance captives there in the 1960s.
During the 1980s, the establishment of companies specialized in third party liability risks like Ace and Exel (later renamed XL) has paved the way for new foundations in the region.

With funds flowing from various European, American and Australian countries, the companies Renaissance, Mid-Ocean, Cat Ltd, LaSalle Re, Terra Nova, Global Capital Re, Partner Re and Tempest Re have been established to underwrite natural catastrophes risks. Having joined the market at the beginning of a very favorable cycle, those companies managed to grow rapidly.

Initially focused on natural catastrophes and third party liability risks, they have gradually extended their geographical and technical scope of action to become generalist reinsurers.

The Bermudan market has witnessed important mergers:

• Ace acquired Tempest Re in 1996 and Cat Ltd in 1998.
• Exel bought out Mid-Ocean and Global Capital Re and took the name of XL Capital.

Ace and Exel, thus, became the most important reinsurance companies specializing in natural catastrophes risks on the Bermudan market.

• In 2009, Partner Re has acquired Paris Re which allows the new group to become the fourth reinsurer in terms of capitalization.

Partnership with Europe

Endowed with considerable shareholders' equity, some Bermudan reinsurers went for the conquest of the world through the purchase of traditional companies' portfolios. Their first target was the Lloyd's with the takeover of several syndicates. They, later, developed partnership ties with European and American insurance groups.

• Partner Re acquired in 1997 SAFR (France), and quickly afterwards the reinsurance department of the Swiss insurance group Winthertur.
• XL set up “Le Mans Re” in 1999 in partnership with the Mutuelles du Mans assurances.
• Ace has acquired Westchester and bought out Cigna's non-life operations.

This strategy enables Bermudans to achieve better homogeneity for their portfolios and build a capacity able to withstand bad cycles.

2001: the break point

Following the 09/11 attacks, a new wave of reinsurance companies has emerged in Bermuda, with a view to cover attacks and terrorist risks. Capacity building is achieved as follows:

• either by increasing shareholders' equity of existing companies*:

  	Additional capital in USD
  ACE	1 billion
  Arch Reinsurance	1 billion
  Partner Re	350 millions
  Renaissance Re	233 millions

  * Non exhaustive list
• or by establishing new entities*:

  	Capital in USD
  Allied World	1.5 billion
  Aspen	200 million
  Axis specialty (Renaissance Re group)	1 billion
  Da Vinci Re	500 million
  Endurance Specialty Insurance	1.2 billion
  Godshawk Re	150 million
  Montpellier Re	1 billion
  Olympus Re	600 million
  Platinum	1 billion
  Queens Island Re	1 billion
  White Mountain Group	1 billion

  * Non exhaustive list

Companies set up between 2005 and 2006

New players have made their entry on the Bermudan market in 2005 and 2006.

The European pattern

European reinsurers are dominating the international scene. In 2008 and according to citizenship criterion, 28% of the premiums were underwritten by German reinsurers, 9.2% by the Swiss. American and Bermudan reinsurers in 2008 underwrote only 21% and 9% of net premiums worldwide.

Features of the European market

Characterized by a dense concentration, this market is monopolized by four major reinsurance groups: Munich Re, Swiss Re, Hannover Re and Scor. They stand in top positions of the world's reinsurance ranking. The emergence of such groups and the disappearance or the takeover of numerous medium-size companies has been prompted by:

• negative result cycles
• shareholders' apathy
• requirement of substantial funds
• insurance and reinsurance groups mergers

Unquestionably, the European market is developing thanks to:

• a limited number of reinsurers operating on an economically important market
• a capacity quite similar to that of the London market in fire, and miscellaneous accident risks
• extended partnership ties, based on the idea of continuity
• closeness with the clients to which it provides a number of technical services
• reinsurance contracts often drafted in the customer's native language
• cedant companies which establish and settle payments in the currency of their country
• swift and flexible techniques for the management, accounting and settlement of claims
• a flexibility and a capacity to adapt to different markets, legislations, banking and fiscal environments

Reinsurance in 2009

Reinsurers' ranking in 2008

Following the heavy losses sustained in 2008, due to their investments, reinsurers have to shape up in 2009.

Tariff increase has, in fact, been activated as of 2009, during the January renewals in Europe, the April renewal in Asia and the July renewal in the United States. Most reinsurers have revised their prices upwards by 10 to 15% in most sensitive areas and in specific classes of business. Rates seemed to progress by an average 11% in the United States, even attaining 40% for risks located in the Gulf of Mexico.

Outstanding performances

Reinsurance has apparently resisted well the crisis. The sector is quickly recovering its 2008 losses.
The large reinsurers are displaying sound operational performances at the close of the first 2009 semester. Shareholders' equity has improved during the first semester of 2009:

During the first 2009 semester, the shareholders' equity of all reinsurers has grown by approximately 10%.

A booming sector

Some trends seem to play out in 2009:

• a consolidation at the international level is noticed with two mergers:
  • Partner Re buys out Paris re for 2 billion USD
  • Validus Re acquires IPC Re for 1.7 billion USD
• an endogenous growth: to improve their performances, reinsurers are targeting internal growth and not acquisitions any longer
• tariffs revised upwards
• an increase in reinsurance demand and a shrinking supply. Reinsurers seem to be more cautious and more selective

Reinsurance leaders' results for the first 2009 semester

The reinsurance market is resisting the shocks well and getting back to profits in a very short time.

• Munich Re has posted the first 2009 semester results which are above expectations. In the second quarter, gross premiums have increased by about 15% compared to the same period of last year.
• Swiss Re has taken advantage of the recent renewals to retarget its underwritings and to withdraw from third party liability operations. The Swiss reinsurer is aiming at a combined ratio that is below 95% in 2009.
• Hannover Re has benefited from a boom in non-life reinsurance, and especially in life and health reinsurance.
• Scor has accompanied its 2009 July renewals with a tariff increase of 5%, (following a 3.3% rise in January) and a premium volume increase of 20%.

Results of the first semester 2009 

in millions USD