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IMPROVING SKILLS, EXPERTISE PRIMARY

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MONTE CARLO, Monaco-The reinsurance needs of primary insurers are changing.

Rather than simply turning to reinsurers for additional capacity, insurers more frequently are seeking added services from their reinsurers, a panel of insurers and consultants say.

Reinsurers are now expected to provide analytical services, advice on product design, global expertise and tailor-made products, they say.

To meet those expectations, reinsurers must develop their expertise and skills and evolve into high-quality service providers, as well as providing secure capacity, the panelists said at the formal session of the Rendez-Vous de Septembre in Monte Carlo earlier this month.

The reinsurance needs of primary insurance companies are changing as they are pressed to provide more value to shareholders in an increasingly deregulated environment, said Michael Muth, a director of McKinsey & Co. Inc. in Munich, Germany.

Insurers are growing larger through mergers, facing new risks, a new risk management culture is growing in industry, and insurers are expanding into other markets in search of growth, he said.

"It all comes back to shareholder value," Mr. Muth said.

And insurers are expecting their reinsurers to provide additional skills to help them give their shareholders the extra value, he said.

"A drive for quality and value-added is becoming the critical marketing factor in this market," Mr. Muth said.

In particular, insurers are seeking vastly higher levels of skills from reinsurers that provide non-proportional, facultative or alternative transfer reinsurance, he said.

"Skills will be more important than capital. . .capital cannot win the competitive battle; skills can because they provide value to customers," he said.

Already, there is nearly twice as much capital available in the worldwide reinsurance industry than is needed to cover the risks to which reinsurers are exposed, Mr. Muth said.

To offer the increased skills that insurers are demanding, reinsurers will have to embrace a new culture of professionalism, he said.

Those that don't eventually will be forced out of the market, and the remaining reinsurers will mainly be large, leading reinsurers and small specialized companies, Mr. Muth said.

"And the large leaders will not be broad-based; they will have the resources to specialize themselves, and they will be multispecialists," he said.

Reinsurers are beginning to follow the path investment banks followed in the late 1980s and early 1990s, when the banks "reinvented themselves" and became a skills-driven industry, Mr. Muth said.

Like the investment banks, reinsurers are consolidating into a handful of large global companies; there is beginning to be a similarly brutal competition for high-class staff; and some reinsurers are beginning to use similarly sophisticated analysis as the investment bankers do, Mr. Muth said.

The only investment banking trend that has not yet hit the reinsurance industry is the trend to share most of the profits among the skill-holders rather than the shareholders, Mr. Muth said.

Primary insurers are seeking improved services from reinsurers, agreed Bernd Michaels, president of the German Insurance Assn. and head of Provinzial Versicherungsanstalten der Rheinprovinz, an insurance company in Dusseldorf, Germany.

In addition to providing adequate capacity, reinsurers will be expected to have much more detailed knowledge of their cedents' business, he said.

"In the future, a reinsurer will have to know a good deal more about its cedents' market behavior and sales channels than was previously the case," Mr. Michaels said.

By obtaining this detailed knowledge, reinsurers will be better placed to offer tailor-made products for cedents, Mr. Michaels said.

The analysis provided by the larger reinsurers also may help their cedents better understand their own risks, Mr. Michaels said.

"It goes without saying that such special services also require special remuneration. Direct insurers appreciate this; regrettably, our clients, when we offer them special services in such areas as claim prevention, do not always appreciate this and believe that the premium payment should also cover all additional services," he said.

Insurers also will seek advice from reinsurers regarding product design and the pricing of primary insurance, Mr. Michaels said.

However, reinsurers should be careful not to favor one cedent over another, especially when it draws on data it has obtained from all its clients, he said.

The growth and changing corporate structures of primary insurers is changing the demands they make of their reinsurers, said Denis Kessler, managing director of AXA-UAP in Paris.

As primary insurers consolidate, "there is less need for reinsurance, because we are able to mutualize the risks," Mr. Kessler said.

At AXA, the group is able to buy reinsurance more efficiently by centralizing the function for all the individual units of the company, Mr. Kessler said.

"Each unit is obliged to take out reinsurance within the group, and the reinsurance unit optimizes the purchase of group reinsurance, taking full advantage of market conditions," he said.

The reinsurers that AXA looks for to take on the risks are ones with "global vision," Mr. Kessler said.

"They must have global and local expertise," he said.

They also must have leading-edge expertise, imagination and the technical capability to produce tailor-made products at a reasonable cost, Mr. Kessler said.

And they must be prepared to enter to long-term relationships with cedents, he said.

Reinsurers in the future will have to work even harder to show cedents that they provide added value as well as capacity, said John J. Kriz, managing director of Moody's Investors Service Inc. in New York.

"Cedents are looking for solutions and to be made aware of challenges they may have been blissfully unaware of. Reinsurers which can do this, and deliver the means to address the challenges, will find themselves with happy clients seeking them out," Mr. Kriz said.

Successful reinsurers also will have to use technology to speed response times and help cedents fundamentally reduce costs, Mr. Kriz said.

"Simply putting PCs on the desks won't do," he said.

But despite providing added values, successful reinsurers still will have to underwrite successfully in order to prosper, Mr. Kriz said.

"The pre-eminence of underwriting and accumulation management will become more apparent when financial markets weaken and investment returns do not provide the profit support they have in recent years," Mr. Kriz said.

Peter Lutke-Bornefeld, chairman of the board of executive directors of Cologne Re, moderated the session.