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Globalization heads into reverse.

A recent report by Price Waterhouse suggests that enthusiasm among the world's insurers for expanding internationally is waning, making it the latest indicator of a new mood of caution, even pessimism, among insurers about overseas expansion.

The Price Waterhouse report follows a Swiss Re economic report (Sigma, April 1991) that reviewed the effects of the liberaizing efforts which the European Community and the General Agreement on Tariffs and Trade has released over the past few years--most prominently, the spate of insurance company takeovers and mergers. Sigma asked: Why was the insurance industry responding in the way? Presumably, it was because bigger companies can achieve economies of scale. Sigma, researching whether the big companies were getting a payoff in reduced costs, found that quantitative evaluation of insurance companies in the United States, Germany, the Netherlands, Austria, Switzerland and Japan did not reveal any economices of scale advantage in big companies. Indeed, average costs declined in smaller companies in the United States life and Dutch and Japanese non-life markets. Sigma concluded that there was "no economic necessity for companies to grow. The versatile supply structure in the individual markets also holds considerable potential for smaller enterprises with a variety of distribution systems, special product mixes and market niches."

If it is true that there is no economic necessity for companies to grow and, as Price Waterhouse notes, overseas expansion for many companies has meant larger underwriting losses and difficulties in hiring qualified overseas personnel, then why have insurers attempted to globalize? Partly, to "follow" their industrial clients' expansion abroad but, paradoxically, to retain existing business. Take the example of the EC.

Without the benefit of history, the dispassionate observer of the European scene--insurance and the rest--would find it difficult not to conclude that a partnership of nations with common interests, close geographical connections and a similar level of economic development, was moving inexorably toward the creation of a single political-economic-social unit--simply, a larger nation whose development is perhaps analogous to the creation of the modern Germany or Italy from Independent states. This observer would then conclude that Europeans must therefore be gradually but systematically shedding their narrow, nationalistic, economic aims in favor of specifically Europeanwide purposes. After all, companies in Britain choose the most sensible area to locate their centers of operations without regard to parochial loyalties--for example, General Accident in Perth, Scotland, Royal in Liverpool and Sun Alliance in London. So, as the EC gradually develops into one country--let's say it does for argument's sake--won't we see Allianz centering its operations in London, Sun Alliance deciding to run its global affairs from Rome and UAP moving its bank account and employment opportunities to Madrid?

No, we'll never see anything like this. Whenever Europe's stasis has been threatened, as the historically minded know, counterforces have intervened. When the victorious nations met at the Congress of Vienna after the defeat of Napoleon, the resulting counterforce was the "principle of legitimacy." The social and political order, and former national European boundaries had been broken by war; the principle of legitimacy which, broadly speaking, asserted that territories should belong to their hereditary sovereigns, restored normality.

Today, the upsetting of the economic and political order in Europe is provoking, as historians would expect, inevitable reactionary measures.

While the political discussion continues about an ever-closer union of the European nations, its trading groups, including insurers, are responding by forming alliances and strategies designed to preserve traditional values and markets in changing times. Today, insurers face each other across national borders in Europe, they do so not as members of a merging community but more like opposing armies whose sense of vulnerability has been heightened by the virtual removal of their natural defenses, in other words, those national borders.

Although there is much activity among insurers in Europe, most of it is explicable with an updated principle of legitimacy. Insurers and national insurance industries are struggling to ensure, above all else, that their "hereditary sovereignty" is not lost. This motivating factor explains most of the takeover/merger/realignment activity now evident.

Exactly as the former political alliances in Europe were created primarily for self-protection and secondly to neutralize potential opposition, so are European insurers today tending to favor strategic links with selected partners in other European countries which give them not only independence in their home markets but also the added strength of their alliance partners while abroad in the enlarged, freer yet more dangerous new European market.

The recent discussion among Royal of Britain, Aachener und Munchener of Germany and Fondiaria of Italy on the possibility of forming a Pan-European alliance follows precisely this line of thinking. So does the Scandinavian link-up of Skandia of Sweden, UNI Storebrand of Norway, Hafnia of Denmark, various Finnish and other European insurers, and the Swedish bank SE-Banken; obviously the Nordic world does not intend to be marginalized by development in Europe.

The real motive for much of the international activity we have seen in recent years, it transpires, is not a desire to globalize but a need to protect the status quo in changing conditions. One reason Price Waterhouse found that globalization may have reversed is because American and Japanese insurers have realized that post-1992 Europe is not going to be a closed market. So, it is perceived, if conditions are not changing, there is no need to pursue globalization.

You won't get far in your understanding of physics until you grasp the principle of inertia--nor in your understanding of the insurance industry.

Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.
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Title Annotation:London Perspective
Author:Best, Chris F.
Publication:Risk Management
Date:Feb 1, 1992
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