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Heidi E. Hutter is bridging the gap between the old and the new in reinsurance.
When she joined Swiss Reinsurance Co. straight from college in 1979, she entered the traditional world of reinsurance in the traditional role of actuarial assistant.
Since that time, Ms. Hutter, 40, has come to represent the untraditional. In the 1980s, she joined the then-pioneering world of financial reinsurance at Swiss Re subsidiary Atrium Corp. From 1993 to the end of 1995, she took on the highly unusual task of creating a reinsurer to help solve the long-tail liability problems of Lloyd's of London.
After overseeing the establishment of Lloyd's runoff reinsurer, Equitas Ltd., Ms. Hutter returned in early 1996 to Swiss Re in New York, where again she was in the limelight as a woman not yet 40 who was chairman, president and chief executive officer of Swiss Reinsurance America Corp.
Recently, she spoke to New York Bureau Chief Gavin Souter about change and the future of the reinsurance industry.
In your time in reinsurance, how would you say the industry has changed?
I think several things have gone on. For one thing, in the reinsurance business we have a far deeper understanding for what the basis of reinsurance is all about, and that underlies a lot of the other trends.
For example, look at globalization, the development of financial and finite-type reinsurance alternatives. A lot of the things that we've seen as developments, I see more and more as symptoms of an underlying issue, which is the pressure on companies for performance and the need to look at risk and return so that one brings those together as return on risk-adjusted capital.
What is the understanding of what reinsurance is all about?
When I joined the industry, I remember some of the things that I was told early on, and the impression I had was that companies bought reinsurance because they always did. There was a very large element of tradition, and some of the early things I learned about reinsurance were the time-honored traditions, the uberrimae fidei, the long term, the pay-back concepts that one didn't just have a business relationship but that one had a long-term relationship with a reinsurer.
Many of the best parts of those things still exist, but I think the feeling I had when I joined was that insurance companies did this because they had to, and one could hardly think of an insurance company that didn't have reinsurance, so it was just part of the nature of being an insurance company. You had these nice people called reinsurers who took over the big risks because the insurance company didn't have experience with that, and there was a whole different aura around the reinsurance environment in those days.
Now, more and more we can see it's not that those things were wrong, but the reason companies buy reinsurance is actually grounded in economics and finance, and a lot of good behavior is actually grounded in logic.
So is it that companies have a better idea about why they buy reinsurance?
I think different companies are at different points in their cycle. In general, there's a better understanding of why people buy reinsurance and, as a consequence, more and more companies are looking at why they buy it and if they should continue to.
Of course, there is also pressure to find more optimal ways to buy reinsurance or in some cases not to buy reinsurance and use alternatives and other mechanisms instead.
What impact would you say that financial reinsurance has had on the market?
I think the impact that it has mainly had is that it changed the way people looked at reinsurance. The early financial contracts were solutions for particular problems, where reinsurance became the vehicle for the solution, and those early products were the beginning of the wave of the solution-driven mentality that we and others are proponents of. It's a mentality that says the reinsurer is not exclusively a company or a group of people that sells reinsurance products but rather functions as not only a risk-taker and risk-sharer but also a solutions provider.
In the past couple of years we've seen a lot of consolidation. Is that just part of the cyclical nature of reinsurance and we'll soon see other reinsurers sprouting up, or have things changed forever so that you've got to be big to compete?
First off, I think the consolidation has been a good and necessary thing in the United States. I think during my career we have had time periods when we've had too many reinsurers, in the sense that there is more capital chasing too little expertise, and expertise is a thing that we are still in short supply of, and unfortunately we still do some foolish things in our industry as a consequence of that.
I'm delighted that the number has concentrated down, because it is what I view as the winnowing out of the amateurs. There is certain critical mass that one has to have as a reinsurer to have the kind of rating tools and techniques, to have the cat modeling, to have the understanding just to be on top of the technology alone in terms of products developments, and what's on the horizon in terms of legal issues.
So I think one has to have a certain level of expertise and the related size that comes with that. So from that standpoint, I think it's been a necessary trend.
Some people then go on and take any trend and extrapolate. If you look at some people's forecasts, one almost has a sense that they would get to the point where you have a negative number of reinsurers in the world.
I think as with any other marketplace, there always are opportunities for new entrants. It's not a one-directional trend; I'm convinced that there will be some new companies along the way, but on the whole, it's a consolidation trend.
Why was Lloyd's of London not left to market forces and allowed to disappear? Why was a special effort made to keep it going?
I'd not agree with the way you phrased the question. I think it was left to market forces. There was not a government bailout, and Lloyd's did have to deal with its own problems.
I think that outside the industry, many people didn't understand that those within the industry did not want to see Lloyd's fail and that there's a recognition that a major failure reflects badly on the entire industry.
In terms of Lloyd's and reconstruction and renewal, of course you are right in calling it a special effort. One would hope that it's a special effort that never again gets repeated in Lloyd's history. I hope that is a once in a 300-plus years event for everybody's sake.
From your standpoint now, though, it would be a competitor out of the way, wouldn't it? What is special about Lloyd's? Why does Lloyd's have to continue?
I, for one, never had the sense that Lloyd's needed to be saved or in fact that it was saved because it was special. I think it comes back to market forces. I think the reason it all came together was that many people saw and believed that there was an ongoing viable business, and so corporate capital came into marketplace. If there was no ongoing profitable business, I think the entire organization would have been put into runoff. But it was market forces in 1993 that felt that there was value that caused people to make the investment.
In the longer horizon, would I be happier if there were one less competitor? In a small way one could answer, "Yes," but to a large extent, my organization doesn't really compete head-on with Lloyd's, and they do provide reinsurance and insurance in a lot of areas.
We'd all love to see a tightening of the market, but it will only happen when enough people get fed up with the current conditions, and who'll lead the way remains to be seen.
You know all the figures. Do you think Lloyd's policyholders will have their claims paid in full?
In terms of knowing all the figures, one thing I realized is how quickly one's information becomes dated. So I will not try to argue it from a numerical standpoint, but rather I will come back to the fundamental principles.
I think the rationale for creating Equitas was sound and remains sound. The fundamental rationale of bringing together the expertise and managing it in a coherent and cohesive way is as sound now as it was then.
In terms of the actual numbers, obviously we all face uncertainties surrounding things like asbestos and environmental. There was a period in time when the estimates just seemed to be spinning wildly higher and higher.
Most recently, industry estimates seem to have come to a much lower level, and those were the levels on which Equitas was based, so I think there is a pretty good shot at all of it, but it will be decades before any of us knows if we have gotten this right.
In what ways do you think the reinsurance industry will change in the future, and in what ways do you think it should change in the future?
The thing I feel most comfortable predicting is the evolution of the whole financial services industry and the continuation of this process, which we saw the beginnings of in the financial reinsurance world with the blending of some of the more financial techniques and combining that with what had been traditional reinsurance. That I feel quite sure will continue.
I think some people had early hopes that the derivative-type securitization market would take off like a skyrocket, and I think we've seen that there are a number of things that have been created successfully, but it certainly hasn't taken off the way some of the early proponents had hoped it would.
That doesn't bother me, though, because what we see now is that transactions are taking place and that people are finding ways to bridge the traditional and the financial worlds, and so these early transactions are the precursor of more that will follow.
In terms of what should happen, well, I suppose we have lots of people moaning and groaning about the underwriting cycle and hoping we have a correction in the marketplace.
Whether one thinks it should happen or not, I don't think it will, and maybe that's a bit of a cautious reaction, because if I never plan on it happening and if it happens, I'll be pleasantly surprised.
Also, I think the whole industry itself is not as well-positioned in terms of its future. I think insurance just doesn't have the image I wish it did externally, and I wish the image would catch up with reality.
The reality is that we have a fascinating business; we touch every part of economic and social interaction in the world. Yet the image is still of a dusty door-to-door insurance salesman, and I think that is just so out of sync with reality. So I wish the image will catch up with reality, but I don't think that is going to happen anytime soon.
On the subject of insurance derivatives, will reinsurers be able to stand their ground, or will investment bankers come in an take over?
I absolutely believe reinsurers will not only stand their ground but actually enhance it.
I don't see investment bankers coming in and taking the field, because the deals require expertise from both areas. Without an understanding of the risk dynamics, the structuring of a new product doesn't get past ground zero.
Will reinsurers have to become aligned with investment banks?
If a reinsurer becomes aligned to a single investment bank, it actually would lose positioning and advantages. Our great virtue is diversification, and the way we achieve that is through trading with many, many enterprises around the world. And our customers, we believe, would not take too kindly to it if we were too closely affiliated with one firm. Likewise, harnessing to one distribution channel would not be a sensible route.
What about your own position within the industry? You are a young person at the head of a major reinsurer and you are a woman as well, and again that is unusual for someone in your position. Do you think you reflect a change in the whole industry?
My view on women coming through the business and the changing of the guard is it is part of what's happening in the industry. There are simply more women in the insurance industry workforce, and I think my generation has benefited from some women who have pioneered before us, but I think we continue to lead the way and pioneer for the next generation.
I really believe that 20 years from now, no one will even think twice about this.
In the 20 years that I've been in the business, it has changed quite dramatically. I think 20 years from now it shouldn't be an issue for anyone at all.