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European buyers concerned over choice and service

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The relative ease with which the global reinsurance and insurance industry managed to digest the catastrophic events in the Gulf of Mexico that so dominated the risk industry in 2005, coupled with the absence of any major events this year meant that 2006 was not dominated by talk of rapidly changing rates or terms and conditions in Europe.

It became clear that the capital markets had responded comfortably to the loss of capital in 2004 and 2005 and that the new models pushed out by the rating and catastrophe-modeling agencies would not be as punitive as many had originally feared. It soon became apparent that it would be business as usual in 2006.

Reinsurance rates, terms and conditions remained tight, partly because of the evaporation of retrocession coverage, but the big primary companies forecasted and reported excellent results throughout the year.

This enabled them to relax their rates (if not terms and conditions) in all but the most troublesome of lines such as pharmaceutical liability and auto recall.

This overwhelmingly benign pricing environment seemed to direct the focus of the risk management and insurance-buying community away from the usual debates about the evils of the underwriting cycle and towards the broader question of consolidation in the numbers of major insurance carriers and threat to the balance of power that this poses.

This was no idle debate sparked by the lack of real action elsewhere. This year saw some major changes in the European corporate risk landscape at reinsurance and insurance level.

Arguably the biggest change came with Swiss Reinsurance Co's acquisition of the reinsurance and commercial insurance business of Fairfield, Connecticut-based General Electric Co. to leapfrog over fierce rival Munich Reinsurance Co.'s into top slot in the reinsurance league table.

Big boys

The big reinsurance companies, of course, set the parameters within which most of the big primary companies offer their coverage to insurance buyers and so Europe's risk management community was keenly interested in the implications of this deal.

The short-term fear was that the combination of the two companies in areas such as aviation would effectively lead to a reduction in capacity and, therefore, tightening of conditions. It was also assumed that Swiss Re would inevitably seek efficiencies, leading to job cuts and a further reduction in choice for buyers.

Swiss Re's chief executive Jacques Aigrain preferred to take the long view.

He told Business Insurance Europe during the Monte Carlo Rendez-Vous that the acquisition of the GE business could only help buyers in the long run because it would provide the company with even greater diversification by line and territory. This would enable it to more efficiently manage its capital and, ultimately, deliver greater stability, security and even choice for customers.

Leaders

Henri de Castries, chief executive of Paris-based AXA S.A., followed a similar one, when he explained why its acquisition of Switzerland's Winterthur Group was good news for its customers. Michael Diekmann, chairman of Munich, Germany's Allianz S.E., explained why thousands of job cuts and closures of branches would be good for customers. Most dramatically Christian Hinsch, chief executive officer of Hanover-based HDI Industrie Versicherungen and the man responsible for leading the merger of his business with the nonlife business of Cologne-based Gerling-Konzern Versicherungs-A.G., explained the benefits of its acquisition of Gerling for customers.

Risk managers and insurance buyers are, of course, naturally skeptical of all this talk, which sounds very much like the rational, but not immensely convincing, explanations of why Solvency II will be excellent news for buyers, because it will deliver a more capital-efficient insurance community and, therefore, higher security in the long run.

The problem is that the vast majority of insurance buyers in Europe are more worried about a reduction in choice and levels of service offered by their cost-conscious major industrial and commercial insurance providers, rather than the quality of security.

And many believe that the only people who are going to see the real benefits of Solvency II and all these restructurings, efficiencies and consolidations will be the investors in insurance companies and not their customers anyway.

These concerns were best summed up by Ralf Oelssner, vice-president of corporate insurance at Deutsche Lufthansa A.G. and president of the German risk management association the D.V.S. when he said during its annual conference in Munich: "The combination of record profits and record reductions in the level of employment leaves one speechless. The old consensus model of the German insurance industry has been sacrificed to the altar of the stock market."