REINSURERS' SIZE RELATIVE

SINGAPORE-Is there room for small reinsurers in today's market pattern of the big getting bigger?

The question was debated at length at the fourth biennial Singapore International Reinsurance Conference last month, with the answers varying according to the size of the reinsurer responding.

David Denning, chairman and chief executive officer of Copenhagen Reinsurance Co. (U.K.) Ltd. in London, told delegates, "Good things come in small packages." The slogan "big is beautiful" is not necessarily relevant in the reinsurance industry, Mr. Denning said.

But Werner G. Bugl, chief executive of the Singapore branch of Munich Reinsurance Co., said the "concentration process" is giving big reinsurers a market advantage geographically and in product lines.

He predicted the concentration has "not yet found its end."

Large risks, such as earthquakes, storms, aviation fleets and large industrial risks, can be covered only in global accounts, he said.

Mr. Denning, who is a former chairman of the London International Insurance & Reinsurance Market Assn., said: "You only have to look at the Lloyd's building in London to agree that big isn't necessarily beautiful. . . .It can be quite ugly."

However, he said the smaller reinsurers have no place in the alternative risk transfer products market. "It's best left to the larger companies that can afford to make major mistakes," Mr. Denning said.

Mr. Bugl said the alternative markets are a possible threat to insurers and reinsurers but that there is "more smoke than fire, more talk than facts, in this field." If reinsurers continue to act as "superior risk managers for commerce and industry," risk-carrying that involves the financial markets "may become a useful supplement, at best, to insurance and reinsurance, but not a real threat to its existence."

Mr. Denning said mergers and acquisitions have "decimated" the reinsurance industry and are motivated by a "perceived need to improve shareholder value," not to improve the situation for policyholders or employees. Too often, the motivation is "to do what's fashionable," Mr. Denning said.

While some buyers argue that bigger is better because they equate size with security, smaller reinsurers have their strengths, and those that will survive are "quick on their feet, flexible, and have clear, strategic direction," Mr. Denning said.

For example, his company, the U.K. arm of Copenhagen Re, is "one of the most profitable reinsurers in the world, but only 5% the size of Munich Re."

But Mr. Denning did not underestimate the value of ratings, saying a good rating is important to a small company.

While larger reinsurers can afford to be "choosy" about the business they write, Mr. Denning warned smaller reinsurers that profit, not market share, should be the driving force and that they should not be tempted to write bad business. "If your premium level drops to unacceptable levels, don't be tempted to write bad business. Identify and develop new lines of expertise instead," he said.

Small reinsurers have to develop niches in which they can excel and write business they "understand at least as well as anyone else, and a good deal better than most." When asked what niches small reinsurers should be in, Mr. Denning said those in which they can provide service with less capital.

During his presentation, Mr. Denning said smaller reinsurers are able to make decisions quickly and independently. "There are no proven economies of scale in our business," he noted.

Mr. Bugl argued that a large, global player can accept large shares of treaties and individual risks. The costs per piece of business will, in relative terms, be smaller than those of a smaller reinsurer accepting smaller portions of the business, he said.

Large reinsurers are able to afford "superb underwriting expertise," he said. Mr. Bugl also argued that smaller reinsurers are unable to maintain networks of offices around the world.

However, Mr. Bugl conceded there are "ample opportunities for good, small niche players," although the market favors the larger reinsurers.

He said the demand for insurance and reinsurance will continue to grow but that risks, and thus the loss potentials, will become more complex, more hazardous and more difficult to assess.