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Lest You Forget

How times have changed. This was a follow up to the article entitled “Players” about the reinsurers in Canada and market share. It starts with a reference to global leaders and although the chart is not reproduced here the message remains clear for its time. In 1993 and ‘94 the talk was all about the giant Japanese companies and how they are growing to the point of dominating the top ten insurance positions in the world. Then bang as fast as they were idolized they were chastised for faulty management and leadership that almost bankrupt the financial services. The cry to run companies more like the Japanese quickly left the usage of all the motivational speakers. References were no longer glowing and Japanese examples declined from public view. By the end of the century there was no one referencing the Japanese conglomerates other than in a negative sense. Big without transparency was not good. The world was set on a course where “big” quite often meant problems once someone really uncovered the real financials!

In Canada at the time as much as we thought of a couple of our insurance leaders as giants they were not. Often they moved in and out of 50th spot but had no staying power. Not so today as we feel the impact of the demutualization and subsequent mergers and acquisitions. Canada now has some staying power in our top three companies or better “company groups”.

The Canadian numbers regarding reinsurance show how small in comparison to the new numbers I have put in to update the relevancy. Article shows the beginnings of reinsurers playing a more significant role in the Canadian industry. A role that became humungous in terms of risk transfer by the current year. Look at the astronomical amount of growth in new reinsurance amounts in 2003 versus 1993! Who would have believed such a market would exist. Thank all the smart actuaries for making risk transfer such a necessary evil and a management that became risk intolerant. Sort of like banks. Right?

Ross A. Morton


Written in late 1994 and published in an edited form in MO

I have come at the subject of reinsurance from many angles before and will continue to retool the subject to fit the times. Years ago there was unwarranted fear of the reinsurers who operated in the Canadian insurance industry somewhat fueled by reinsurance mismanagement on the other side of the insurance industry, namely the property and casualty side. All of us in the industry deeply buried or sitting on the edge, must keep the role of reinsurers in perspective. The egos of some in the business would escalate the role beyond comprehension, while others meekly hide from any mention at all across the nation.

The Canadian industry has some giants at work yet in terms of our relative size we pale in comparison with the global giants. In Chart A you can see that our two bastions of life insurance no longer rank amount the senior global leaders. This is not all bad since a glimpse of the leaders’ points out that big is not necessarily good. In Canada we, too, have come to appreciate the old adage that the bigger you are the harder you fall (at my size this is more than a metaphor).

Notice how the Japanese companies have maintained a very strong presence in the top 10. If there was room and time to analyze the complete listing of 50 companies you would see a shrinkage in North American players by number and by relative size. The new world order reflects the expansion of foreign companies who increase their bulk and make their names universally recognized. Being on the edge of this list merely means one has to try harder internationally while protecting the national treasures with financial strength.

Reinsurers are merging, acquiring and globally expanding in pursuit of stable earnings, spread of risk, and economies of scale. Is there room for small, niche reinsurers? My guess is no. I see the need for significant spread of risk and avoidance of the variances of one market. Competition at times is so fierce that it is frightening. To be dependent on one overheated market place can lead to pressures on financial stability that belies comparison. In 1994, there was some merging and acquiring, plus lots of global expansion. Signs are the reinsurers are preparing to face the future with much stronger operations (have no fear the life reinsurers of the world are making money and are in strong financial positions). Watch for more strengthening in 1995.

In a 1990 publication by Actex Publications, called Life, Health and Annuity Reinsurance, the word or activity we all love called reinsurance was defined as: “Insurance purchased by an insurance company to cover all or part of certain risks on insurance policies issued by that company.” A great definition and quite acceptable to both the life and general insurance industries. On the general side there are some unnamed names who wish the definition was far more explicit. Personally speaking and out of fear of reprisal, I am forced to never name the names that are unnamed in any publication read by said names.

The reinsurers operating in Canada have been reviewed in a previous edition of Marketing Options and I know Steve could dig them up from the bowels of his computer if you asked nicely. Suffice to say not much has changed. They are all still here and the relative pecking order has not overtly changed. Volume of new sums assured remains the measure most publicly referenced, and, as such, falsely proclaims winners and losers in the fight for new business. When OSFI gets industry numbers out in a useable form and in timely fashion, like the developed nations of Singapore and Malaysia do, we may have far more comprehensive numbers to digest about our industry – insurers and reinsures alike.

All the reinsurers are as concerned with making money as the direct writers (the reinsurers’ term for companies that produced actual insurance policies). Most reinsurers would candidly admit that operating in the international arena brings a discipline to money management to survive. As companies look to reinsurers to be their silent partners in growth and capital management a demand for more than free lunches and golf tournaments emerges. Chart B shows which reinsurer is writing which volumes of new business. Notice how some companies have exited the industry in Canada while others have curtailed operations to better fit their Canadian strategy.

As the competitive pressure on reinsurance price increased and demand for jumbo cases (my definition is the $5 million up policy) decreases, the role of the retrocessionaires decreases. Note in Chart C the flat figures for retros (the affectionate name for retrocessionaires plus it saves twelve keystrokes). As always the retros are needed by the reinsurers to help spread risk as well as supply another source of silent and indirect capital for growing companies or those direct companies who wish to reconstruct their capital usage.

As an aside, because I like asides, when I got to this point in typing this article I used spell check. Several times my fingers hit wrong keys when spelling reinsurers. The suggested word, when “reinsurers” was found as wrong, was reindeer. Ho apropos as I fly north the day after the Santa Claus Parade in Toronto! Who says these laptops cannot think up humorous interjections? If it was foggy my laptop companion would probably recommend Rudolph.

Agents still are unsure about the reinsurers and the role they play with insurance companies and specifically their policy holders. To say, “Have no fear” would be repeating what one large company president said about the safety of very big insurance companies. He now avoids press releases and reprisals for that cavalier statement. Today in the wake of the unheard of, it is not sufficient to echo the phrase. There are few guarantees but the name of the international reinsurers is worth far more than the abandonment of any one country’s liabilities. There is not a reinsurer or international insurer that could survive the abandonment of a market without guaranteeing all future liabilities on its contracts and service of those contracts.

The very fact reinsurers are active in numerous life insurance markets around the world protects against the singular country financial downturn. Mustering the resources from all the other operations around the world helps negate the financial burden of any one county. Political, monetary and risk diversity is the strength of these global giants. They also stay very liquid in their investments, relying on very safe investments to protect them from any nuance in the bond or stock market. To the best of my knowledge there is no Canadian reinsurance operation on the life side that has any real estate investments. In fact, I believe only staff mortgages are held in the reinsurers’ portfolio (handcuffs on key staff).

The onus is on the insurance industry to be unified in its spreading the word on our security. Throwing mud at small or large companies does no one any good. In fact, the splash back on the perpetrator is most likely of greater magnitude than anticipated.

What has become evident to me in the last ten days is the need for unified education of all concerned so that there are no misconceptions about any facet of our industry. Tell the agents about insurance – both risk premium and coinsurance. Tell the agent that there is no binding contract between the insured and the reinsurer. Tell the consumer that there is protection in spreading the risk via a company that meticulously disciplines itself to spread risk. Do not cast aspirations on your fellow insurer because it is often the case that the recipient will not remember more than, “some company is in trouble.” Let us not fear the arrival of the banker in our midst. If we are the masters of mortality and morbidity, why are we worried about the neophyte in our domain? Show me a company that has excelled with a banker at the helm and I will show you a dozen life masters who have succeeded. Amen!

Preaching is complete. I still see us winning the battle of our lives and we will do it together. The “we” will exclude the few who sit and stew on the stove, scuttle their competitors, forget who the customer is and what the customer wants, and finally the industry leaders who long ago lost track of what it is we sell.

Canadian Reinsurance Assumed Amounts in U.S. $Millions