Stockholm Through the Looking Glass.
Stockholm's crisp spring winds and lengthening sunshine gave an appropriate wonderland cast to the International Underwriting Association's (IUA) recent seminar there. Set as it was in the city's harborside Grand Hotel, directly across the quay from the royal palace of Sweden's King Carl XVI Gustaf and his storybook-beautiful family, the seminar chose the theme of "Through the Looking Glass" to encourage fresh views from without as well as within the London reinsurer core.
And while the resulting days of speeches and breakout sessions may not have been precisely Carrollian in terms of upended logic and fresh insight through satire, there was certainly a determination to mirror the global state of reinsurance. Indeed, this was the 14th such biennial seminar, but only the first one since the merger of the IUA's predecessor groups, the Reinsurance Offices' Association (ROA) and the London International Insurance and Reinsurance Market Association (LIRMA). Thus the decision to go global, taking the meeting out of the United Kingdom for the first time.
"If you have a conference every two years, it tends to keep things at a high level," observed IUA chief executive Marie-Louise Rossi, adding that the merger of the ROA and LIRMA was a natural for the London players. "Where we have common ground, why not speak in one voice? So IUA is a coming together that preserves what's good about the London organization but recognizes that our membership is more international.
"At the last meeting, in Dublin, we saw that consolidation would continue, that the market is changing, that there are fewer buyers, fewer providers."
This year's consensus wasn't far removed from Dublin's. It was generally agreed that consolidation would continue among insurers and reinsurers, and that prices weren't likely to be hardening much across the board, despite isolated catastrophes, mainly because the global glut of capital would assure competition, questionable underwriting, and so on. But this year no one was denying that rampant technology--especially the rise of the Internet as a force for change--was breathing down every insurer's neck.
"The Internet's impact on distribution, and thus the ability to be global from any location" was among four key trends isolated by Michael Butt, director of Bermuda's XL Capital Ltd., during one session. "The power of the Internet threatens that naive capacity is going to be a permanent factor in our business."
Butt's other trends: the aspiration of a handful of reinsurance players to be global; the market-share gains of the leaders; and an increasing number of players looking for a smaller percentage of market. He also warned that the continuing stock market boom was generating a confidence that would "continue to underlie our industry," for better and worse.
If there is real progress in reinsurers getting their arms around the technology issue, it may best be represented by the recent convergence of the London Insurance Market Network (LIMNET), Europe's Reinsurance Network (RINET) and the U.S.-based World Insurance Network (WIN) into a single force for global electronic data interface and electronic commerce for insurers. This global grail was championed by Kevin Ashby, LIMNET's CEO, during his speech.
Ashby affirmed that solid business issues would drive electronic commerce, given that traditional cost cutting and consolidation can only go so far while profitability and markets are under threat. Meanwhile, he noted that "customers are more demanding, and efficiency and effectiveness is the key. Other industries have already exploited IT (information technology) and e-commerce as their next step. Insurance is a complex web of relationships," he explained, and thus well-suited to e-commerce.
In keeping with the global emphasis, Aon Corp. president and COO Michael D. O'Halleran, who runs Aon's global commercial broking and consulting unit, spoke with typically tough-minded Chicago conviction about the horizon for insurers and reinsurers.
"I think you will see some surprising acquisitions," he said. "Foreign insurers buying U.S. companies to build a more global platform; banks and investment banks acquiring insurance companies--look at Citigroup. Meanwhile, wholesale is becoming specialization. If wholesalers are to survive, they will have to become the specialized retailers of the business."
The traditional market for insurance will be dedicated to middle-sized and small commercial customers, said O'Halleran, while large customers will see a blurring of lines between alternative risk, insurance, reinsurance, and capital markets.
"The name of the game is returning value to shareholders, against a backdrop of falling interest rates," he thundered. "Traditional capital bases are going to move that capital as quickly as they can--a 6.7 percent, 8 percent return is unacceptable now. Double-digit returns are what they want. We must turn it around! The old model doesn't work. We have to have a horizontal expansion of our business, have benefits and workers' comp work together, and vertical integration as well, of distribution with underwriting. We'll have to find ways to take the cost out of the system."
Challenging the reinsurers, he asked: "As you look through the looking glass, how will you survive? Forget the name reinsurance. All will become reinsurers, insurers, capital markets, as your marketplace grows in terms of volume and access to clients."
Other American voices weighed in as well. Bill Adamson, CEO of CNA Reinsurance, asked how reinsurers would measure success in the climate of consolidation. "Can you sustain the benefits of acquisition over time, hold onto business, retain market share? Is 15 percent return on equity the benchmark?" Most of all, he affirmed that "success is dependent on finding talented people. Mergers and acquisitions bring talented people, but of course they could be picked off by competitors during the merger."
While Adamson agreed there will be no stopping of consolidation and a resultant "greater shareholder activism," he also pointed out that there was no guarantee of economies of scale, that the difficulty of merging different company cultures, different IT platforms, and the loss of corporate knowledge and client relationships were real impediments to success.
And James Duffy, president of St. Paul Reinsurance, focused on some basic economic factors for change. "The shift in reinsurance buying is from proportional to excess of loss," he noted. "And there's an increased role for brokers in complex risks. As demand for excess of loss grows, the demand for the expertise of brokers will grow."
But, in the end, this conference was a London-driven event, and the emphasis on London as the center and crossroads of the reinsurance world was affirmed by none other than Max Taylor, the charismatic chairman of Lloyd's of London. In his presentation, Taylor pointed out that with 40,000 insurance experts, $14 billion in premiums, 112 companies, 139 syndicates, and underwriters of the highest skill, London remained the global leader in reinsurance, despite criticism that it was old-fashioned, slow in claims service and high in operating cost.
He also went to great pains to point out that Lloyd's was building "a truly diverse picture" in terms of its capital base, and that as a broker market, the pressure was on to "add value or die," via an expanding range of services offered by the broker. But the bugaboo of Internet technology--embrace it or die, but how to embrace it?--glinted menacingly through his generally upbeat remarks.
"We do not know what our vision is for electronic commerce in the next century," Taylor chided. And that, he implied, was as much a challenge for reinsurers the world over as for London's core, despite the very real promise of LIMNET.
In that regard, the conference's peek through the looking glass met with an opaque layer.
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|Publication:||Risk & Insurance|
|Date:||Jul 1, 1999|
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