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Reinsurers that want to compete successfully in the future must recognize that more of their business will come from smaller insurers and adapt to meet their needs, a new report contends.
"Primary companies are saying they're going to buy less reinsurance over the next five years, and that occurs in all lines of business except for homeowners," observed Mary Ann Godbout, an assistant vp with Conning & Co. in Hartford, Conn.
As a result, small insurance companies will account for a growing share of reinsurers' business, according to the 160-page report, "A Portrait of Reinsurance: Back to Basics and Beyond, 1997," which Ms. Godbout authored based on a survey of primary insurers and reinsurers.
Another factor influencing the reinsurance industry is globalization, as geographic barriers delineating traditional reinsurance markets are blurring, according to another analysis of the reinsurance industry issued recently by New York-based reinsurance intermediary Guy Carpenter & Co. Inc.
The Conning study concludes that in spite of industry changes, reinsurers still can successfully compete by following specific strategies.
One is by recognizing the differences between what small insurers and larger insurers want, says the Conning report.
For instance, "Developing equity relationships or strong partnering arrangements with reinsurers is more important to small insurers than to large insurers," says the report. "These types of linkages say that smaller insurers value close, stable and ongoing reinsurance relationships."
Small insurers also are particularly interested in buying multiyear contracts, preferably of at least three years, the Conning report says.
"It is clear that flexibility and variety in products and services are what customers want," says the report.
Large insurers rate claim services as most important, while small insurers seek underwriting and actuarial services first, Conning found.
The report also says a shift toward reinsurance buying becoming more of a financial decision than a "purely" insurance-based one will continue "as primary insurers gravitate to managing risk more comprehensively -- just as their own clients are doing."
In addition to satisfying the traditional critical success factors, Conning's report says other strategies reinsurers must adopt to survive and succeed in the future include: avoiding underpriced business and practicing strong underwriting; using sophisticated technology; expanding internationally; and buying back stock.
Both the Conning and Guy Carpenter reports discuss capital markets' prospects for becoming a force in risk financing.
The Conning report says the capital markets "are making inroads to providing new risk protection arrangements, and primary insurers express no fundamental reason to avoid them. The result is that capital markets is both a threat and an opportunity for reinsurers."
The Guy Carpenter report, "Global Reinsurance Analysis 1997," says the financial impact of a $50 billion to $100 billion loss "could be the spark that ignites the broad acceptance" of capital market instruments and other alternative sources of capital.
Discussing the globalization of reinsurance, the Guy Carpenter report's authors say that the reinsurance markets in Bermuda, Europe, the United Kingdom and United States represent a single global industry. The report analyzes each of these markets individually.
"Traditional reinsurance boun-daries have faded, and competition for top-line premium growth and risk diversity is driving expansion. Reinsurers today are less defined by geographic region than they are by global presence."
While both primary insurers and reinsurers have focused on a "growth-through-acquisition strategy," reinsurers have focused primarily on buying other reinsurers, says the report, much of which is derived from Guy Carpenter's proprietary Reinsurance Composite Study.
Meanwhile, "Capitalization levels remain a major issue that likely will continue as long as ceding companies continue to prefer having a smaller group of select reinsurers (possessing substantial surplus) on their programs," Guy Carpenter's report says.
"A Portrait of Reinsurance, Back to Basics and Beyond, 1997," is available for $495 by contacting Lisa Pesci at Conning & Co., CityPlace II, 185 Asylum St., Hartford, Conn. 06103-4105; 888-707-1177 or 860-520-1521.
Copies of Guy Carpenter's Global Reinsurance Analysis 1997 are available at no charge by calling Celia Sam at 212-323-1334; fax: 212-313-4550, e-mail:firstname.lastname@example.org. The report also can be downloaded from the Guy Carpenter World Wide Web site at www.guycarp.com.