Swiss Re - History of Swiss Re in the USA
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Transcript of Swiss Re - History of Swiss Re in the USA
1
The US insurance market
A shared history
4 5
WELCOME FROM:
Christian Mumenthaler
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J. Eric Smith
HeadlineQuatism odolutpat. Duis etum velenis nis elismod olenim volobore duiscip essi tie modit acipsustrud tet niscili quatuer ip exero consendre magna con euguer seniatum quipit volore tie doloborer ipsuscincil in henim dolesting el ute volendit vulluptatie faciliquis nos alismolorer aci tat. Ore venibh et wisi.
Vulputat alit acipisit augait ut ex et vel utat nonum iure mincing eui eumsan ut alit lam aliscidunt lum illa conullaore eum iustis adipis nonsenibh eu facipit ut landre magna con vero duisit iuscincipit, sit wis nis ercip essectet, quam quis niscilis doloreet, consecte magna augiam delit in henim et luptat velis essenim il ullute te dolorem enim vendre te etuerate feum zzril doloborpero dolore faccumm.
Olorper iurero eumsandipsum vent velismo loborerat lorer alit iusciliquis nit lum at iriurercilit acil ipit venibh eummy non esequam ero corer senim zzriliq uamcons equismod ming erat, susto consenim dolobore consectem zzril doloborer iriuscinim doluptatum vel duis alis adignim zzrit niam vel in utpatio duisit autat lum nulput nisit veliqua tuercil ut venibh endignim in ute min hent wiscin venisim vel do odipis adit, volor si.
Dit, sim vent ad dipit ent pratet adip ent wisim dunt autpat.
Ming eu facidunt aciduisim delesto consequat num in ver sequipit delit prat.
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6 7
Evolution of a global risk expert
Fundamentals of successSwiss Re’s early leaders established the sound principles of
reinsurance that have been followed by successive generations
of Swiss Re managers ever since. From the very start, Swiss
Re was to be an international reinsurance company that spread
its risks geographically, built strong client relationships, and
developed access to a diverse capital base.
The early years were difficult for Swiss Re—reinsurance
was a new concept that lacked the sophisticated risk
management tools of more recent times. The primary
insurance market was far from transparent. As a consequence,
client relationships rooted in trust and ‘upmost good faith’
rather than knowledge and facts.
In these first challenging years, Grossmann turned to
Giuseppe Besso, a member of the famous Besso family
associated with the Italian insurer Asscuriazoni Generali.
Besso accelerated Swiss Re’s international diversification, and
continued to build the company as a financially robust and
independent reinsurer.
Diversified form the startRight from the start, Swiss Re had an international outlook,
with only two of its 18 early contracts written with Swiss
insurers.
By the turn of the Twentieth Century, Swiss Re was already
reinsuring risks in Europe, the US, Latin America, Russia and
Asia. It was also beginning to establish a global network,
opening overseas offices and looking to underwrite directly in
key international markets.
The reinsurer also looked to spread risk across an
increasing number of lines of business, writing its first
accident and health contract in 1881, marine reinsurance in
1864, its first life reinsurance policies in 1865, and motor
reinsurance in 1901.
The form of reinsurance contracts also evolved around
this time—in 1890 Swiss Re underwrote its first excess of
loss contract, a type of reinsurance that pays claims above
an agreed level of losses, rather than a proportion of all an
insurer’s losses.
This change in approach would enable reinsurers to focus
on the less frequent catastrophic risks.
In a sense, the modern age of reinsurance had begun.
Catastrophe losses The first decades of the Twentieth Century were marked
by growth in both international exposures and single large
risks—demonstrated by the Spanish Flu epidemic in 1918,
which led to a CHF 1 million loss for Swiss Re, and the sinking
of the Titanic in 1912, also insured by Swiss Re.
However, it was the catastrophic 1906 San Francisco
earthquake that was to be the insurance and reinsurance
industry’s wake-up call. The earthquake and subsequent fire
that swept through San Francisco was a market changing
event. The extent of the damage made insurers rethink the
potential size of losses, as well as the importance of seeking
well-capitalised counterparties.
Within three years of the quake, San Francisco had been
largely rebuilt thanks to payments made by the insurance
and reinsurance industry. The majority of claims were paid
by foreign companies, demonstrating just how globalised the
industry had already become.
For Swiss Re, the earthquake generated the biggest single
loss as a percentage of net premiums in the company’s history,
but establish the Swiss Re brand in the US, bolstering its
reputation as a financially secure and reliable counterparty.
Just four years later, Swiss Re opened its branch in New
York and became an integral part of the US insurance market.
Global market accessAbove all else, the San Francisco earthquake highlighted the
need for further geographical and product diversification,
leading Swiss Re to make a number of acquisitions.
Acquisitions were to feature early on in Swiss Re’s history,
and continue well into modern times. In addition to helping
spread risk internationally, acquisitions give access to new
business, particularly where strong relationships between
local insurers and reinsurers make it difficult to grow.
Early acquisitions saw Swiss Re gain footholds in the
all-important London and German markets through stakes in
Scottish Mercantile and General Insurance Company (M&G)
SHOULDERING RISk— Swiss Re’s rise to become the global expert in taking and managing risks mirrors the dramatic social, economic and political development of the last 150 years
SWISS RE WAS ESTABLISHEd IN 1863 To MEET
demand for an independent reinsurer that would spread
risk in a rapidly changing world. The following 150 years—a
period of unprecedented change driven by a revolution in
science and technology, have seen Swiss Re become a leading
international provider of reinsurance capital and risk expertise.
Rising from the ashesRapid industrialisation and urbanisation throughout the
1800s were creating concentrations of risk, requiring insurers
to diversify their exposures. A clear role was emerging for
independent reinsurers that could shoulder and spread
insurers’ risks, develop expertise, provide capital and thus
contribute to secure the value generation to follow to the
present day .
The world’s first dedicated reinsurer, Cologne Re, was
established in the aftermath of the Hamburg fire of 1842.
Swiss Re was to be the world’s second.
Swiss Re’s beginnings date back to a devastating fire
that destroyed the thriving Swiss town of Glarus in May 1861.
The fire, which hit some local insurers with claims five times
their reserves, highlighted the threat of major catastrophes to
the Swiss insurance industry and demonstrated the need for
reinsurance protection to provide protection for events with a
low frequency but a yet unknown severity.
The country’s insurance industry responded swiftly,
and the head of Swiss insurer Helvetia’s fire and transport
business, Moritz Grossmann, proposed the creation of the first
dedicated Swiss reinsurer. The Swiss Reinsurance Company
first opened its doors in Zurich on december 19, 1863, with
CHF 6 million of share capital raised from a diverse group of
investors, including two Swiss banks.
CONTINUED ON NEXT PAGE
SWISS RE’S HISTORY
From its early settlement by Europeans in the 1500s and evolution into a leading world power by the late 1800, the United States has been a vibrant and attractive market for insurers and reinsurers.
With impressive economic expansion, a fast growing and increasingly affluent population, and an exposure to natural catastrophes, America’s needs for risk protection shaped the history of the insurance and reinsurance sector as we know it.
Today the US insurance market is the world’s largest—accounting for some 27% of total global insurance premiums. It is also one of the most sophisticated, being the originator of many innovative consumer and business insurance products and risk management practices.
But it was not always the case. It is hard to think that the United States, a global economic and political power, was, in a sense, the emerging market of its time 150 years ago. As it evolved, the US underwent many of the same processes that we still see happening in today’s emerging markets.
Like emerging markets today, the United States has proved to be an irresistible opportunity for many insurers, but it was not short on danger. Insurers and reinsurers exploring the early American market were operating in virgin territory, working with a complex and burdensome regulatory system, catastrophe exposures of epic proportions, and then later, a costly pro-consumer tort system.
More recently, the terrorist attacks of September 11, 2001, Hurricane katrina, and the financial crisis have highlighted the complexities of the reinsurance markets in a globalised world. Even today’s sophisticated models and past experience are unable to predict the future, and just as in the early days, every unexpected or record event puts into question the notion of insurability.
The history of the insurance market in America is as insightful as it is fascinating, offering a salutary reminder of the role that insurance and reinsurance performs in a successful society, as well as some of the challenges.
From the building of skyscrapers at the turn of the last century to the high tech industries of today, America has shown a willingness to take risk, as well as leading the world in the development of insurance and risk management.
US insurance
Genesis of the World’s Most Influential Market
8 9
two, as the owner of the WTC had claimed.
The first decade of the 21st century put
into question the insurability of some large
risks. Hurricane Katrina, which produced the
highest damages of any natural disaster in
history, cost Swiss Re $1.2 billion. Although
it demonstrated the resilience of the industry
to absorb devastating losses, within six
years later the toll of the 2005 hurricane
season was equaled by a string of natural
catastrophe events in the Pacific region,
starting floods in Australia, a sequence of
earthquakes first in New Zealand and later in
Japan, followed by a tsunami and finishing
the year with yet another flood in Thailand.
The financial crisis of 2008 was also
tough on Swiss Re. The company made a loss
(CHF 864 million) in 2008, mainly the result
of investment losses and the performance of
two Credit default Swaps.
After de-risking its asset portfolio
and concentrating on its core reinsurance
business, the company emerged from
the crisis as a leading
participant in the
reinsurance market—
ratings agency
Standard & Poor’s
raised its ratings on
Swiss Re to ‘AA-‘
in october 2011, in
recognition of
the company’s handling
of the crisis.
Preparing for the futureIn 2011 Swiss Re
implemented a new legal structure to support
its strategic priorities and refine its business
model by creating three separate business
units, namely Swiss Re’s existing reinsurance
business, along with two new entities for
Corporate Solutions and Admin Re®.
The company also continues to invest
in the future. In 2003 Swiss Re opened
its award-winning St
Mary Axe building,
affectionately known
as the Gherkin, while
work began on a new
building at Swiss Re’s
headquarters in Zuruch
in 2012.
By staying true
to the fundamentals of
reinsurance championed
by Swiss Re’s early
leaders—the importance
of diversification and
long lasting client
relationships—Swiss Re has weather many
storms in its 150 year history, continuing to
provide its clients with a secure partner in
risk. The history of the company shows the
pivotal role reinsurance has played in the
management of risk. And with Swiss Re at
the forefront, it remains well-position to
carry on doing so.
in 1915 and Bayerische Rückversicherung of
Munich in 1924.
Financial crisisThe 1929 stock market crash in the US stock
and subsequent Great depression showed
insurers and reinsurers for the first time that
they were exposed to significant risks on the
asset side of the balance sheet.
The crash led to write downs of assets
at Swiss Re amounting to almost CHF 26
million, although the company was saved
by its accumulation of hidden reserves
–some CHF 30 million were taken from
these reserves in 1931 to cover record
losses. However, Swiss Re learnt valuable
lessons, and the crisis marked the birth of
asset liability management at Swiss Re,
an important risk management tool that
continues to be used by insurers today.
Redrawing the mapWhile German and Russian reinsurers were
expelled from international business
around the time of the two World
Wars, Swiss Re was able to
capture a market-leading
position in the US.
However, the radically
different world that
would emerge after
the Second World War
constrained reinsurers’
ability to spread risk.
A number of markets
were now off limits—with
those in Central and
Eastern Europe slipping
behind the Iron Curtain
while others, such as
Brazil and India, became
state owned. At the
same time, other markets were enjoying
a boom in consumer spending, leading to
higher concentrations of risk in markets like
the US and Europe.
Swiss Re continued to seek geographical
and product diversification, developing a
leading presence in new markets, including
Canada, Australia, South Africa and then
Asia, as well as rapidly growing industries like
energy and aviation.
Focus on core business In response to the growth in risk management
and the trend towards greater self-retention
in the 1980s, Swiss Re began expanding
its service offering, acquiring insurance
service companies, as well as increasing its
participation in the primary insurance market.
However, although dependent upon each
other, Swiss Re discovered that the actual
management of a primary and a reinsurance
company had little in common. in 1994
a new management team refocused the
company’s operations back on reinsurance,
reinvesting the proceeds from the sale of its
primary insurance businesses in achieving its
strategic goal of becoming the world’s largest
reinsurer. Growing catastrophe exposures
and an increasingly complex and globalised
risk landscape were beginning to drive
demand for large, well rated expert managers
of capital and risk.
Swiss Re sought to grow its life
reinsurance business, develop its Insurance
Linked Securities offering and expand its
direct corporate insurance unit, as well as
further globalise its nonlife reinsurance
operations.
In the 1970s Swiss Re was one of
the first reinsurers to recognise
the importance of emerging
markets. In more recent years
it began opening offices in
key markets, seeking to
build strong relationships
and expertise through
a local presence. Most
recently Swiss Re
obtained licences in
Korea in 2002, China
in 2003 and Japan and
Taiwan in 2004.
during this period, Swiss
Re took on much of
its current corporate
form—it adopted a single
brand operating from
one global capital base, providing the highest
levels of financial strength, expertise and
tools to clients, whilst remaining attractive to
a wide range of capital providers.
New risk frontiersFollowing Hurricane Andrew in 1992,
which was the largest insurance industry
loss at that time, Swiss Re began working
with Swiss bank Credit Suisse to develop
alternative financial and risk transfer
solutions.
developments in actuarial modelling
and a growing interest in hedging risk in the
1980s, led Swiss Re to explore developments
in capital markets and bring new financial
products to existing and new clients. The
growth in Swiss Re’s financial products
business helped forge lasting relationships
between reinsurers and capital markets that
had not really existed before.
A new era was beginning, and capital
markets had been opened up as a source
of additional and complimentary capacity.
Innovative products were also been
developed, including some of the first
Insurance Linked Securities, Public Private
Partnerships and those that incorporate
derivatives and parametric triggers.
Market consolidation and expansionWith strategy firmly fixed on its core
reinsurance operations, Swiss Re
strengthened its position by buying
competitors in a number of markets during
the 1990s and 2000s.
The company made a series of
acquisitions in the US life reinsurance
market between 1995 and 2001, increasing
Swiss Re’s share of the US life reinsurance
market to 25%, a market leading position.
The acquisition of Life Re also brought
opportunities through AdminRe, an
operation specialising in the acquisition and
administration of run-off business.
Swiss Re’s largest acquisition was the
$7.6 billion deal in 2006 for GE Insurance
Solutions, the fifth largest reinsurer at
that time. The transaction reinforced
the reinsurers leading position in the US
reinsurance market.
Challenging timesThe opening decade of the Twenty-first
Century was challenging for global insurers
and reinsurers, including Swiss Re.
The terrorist attack on the World
Trade Center in 2001 not only cost three
thousand lives and billions of dollars in
property damage, it also changed insurers
thinking about the possible size of losses
and the interconnectivity or accumulation of
seemingly unrelated risks.
Swiss Re underwrote half of the $3.5
billion coverage for the WTC, and insurance
claims from the attack contributed to Swiss
Re’s first net loss since 1868.
It took five years before a New York Jury
ruled in favour of Swiss Re and other insurers
in the largest insurance litigation ever,
confirming the attack was one event and not
CONTINUED FROM LAST PAGE
Guiseppe Besso, General Manager of Swiss Re, 1865-1879
Moritz Ignaz Grossmann, Founding Father of Swiss Re,
Member of the Board (1863-1870)
SWISS RE’S HISTORY
PRODUCTS: The Value Of Reinsurance: Enable & FacilitateUNLIKE CoNSUMER BRANdS oR CAR MANUFACTURERS,
REINSURERS ARE LARGELY UNKNoWN To THE WIdER PUBLIC. THIS
doES NoT impair the vital function reinsurers perform in shouldering
extreme risks, as well as supporting and often enough facilitating
economic growth and development.
Few people give much thought as to who should compensate
them if they are injured at work or if a storm destroys their home –
that is until it happens to them. Governments and business have a
role, but usually it is insurance that pays the bills.
Living your life means taking risks, and insurance has become a
valuable tool to mitigate these risks. Whether it is cover against fire,
theft, the risk of being sued, an accident or a disease, insurance can
help manage the unexpected, reducing the impact by spreading the
risk among a wider population.
Reinsurance has a long tradition in enabling new technologies.
Beyond supporting insurers in providing cover to individuals, large or
specialized insurers and reinsurers perform an essential role as risk-
takers, and thereby facilitating the development of new products or
investments in infrastructure.
For instance, the launch of new consumer goods or a
pharmaceutical product would be impossible unless an insurer
assumed the casualty risk. Likewise, the proliferation of skyscrapers
could not have happened if investors were not certain that their
investment would be safe, even in case of a devastating fire or an
earthquake. From a societal point of view, ultimately insurance
protects progress, because it assures that values accumulated over
time will not be lost in case of a large catastrophe.
However, many providers of insurance are local and specialist.
This makes them vulnerable to very large or unexpected losses.
This is where reinsurers come in to play. They are the insurers of
reinsurers.
Reinsurance by definition is a global business. While insurers
often concentrate of the needs of their customers in a certain region
or risk categories, reinsurers are able to diversify and balance the
risks across geographies. Reinsurers stand behind insurers, making
sure that they can cope with very large losses or once in a life time
events that would threaten their ability to pay claims. Reinsurers
promote an efficient use of capital and help protect insurers’ earnings
by transferring concentrations of risk to financially secure partners
around the world.
one insurer could suffer crippling losses if hit by a storm or
a major fire loss, but through the mechanism of reinsurance, the
insurance industry can mutualise these catastrophic losses.
By spreading the risk into global reinsurance and capital markets,
reinsurers make it possible for insurers to provide affordable
protection for the most extreme and unexpected risks, providing the
funds to help a society and businesses rebuild and quickly get back
on its feet.
Reinsurance also supports the wider growth of the economy and
the development of a more sophisticated society.
As an economy grows and as businesses face ever more
challenging exposures, insurers can help manage the risks. They
can help identify emerging risks – such as nano technology or the
affects of climate change -, stimulate debate and invest in research
and development, as well as supporting business as they expand by
providing working capital and expertise.
10
REGULATION: Where Liberty Has Its Costs
REGULATIoN HAS BEEN AN IMPoRTANT FACToR IN SHAPING THE
US insurance market, and a major challenge to foreign insurers.
despite heated debates on the role of federal government, most
recently after the 2008 Financial Crisis, insurance regulation has
largely been drawn along state lines, although federal statutes and
self-regulation do also play a part.
Competition between states and sensitivities around freedom,
liberty and central government power have long dominated US
politics, and are reflected in the state-based system of insurance
regulation.
After the War of Independence, US states were loosely joined in
a federation, but continued to operate their own legislature, a factor
that has resulted in differing rules and regulations across the US that
survive to this day. As a result the US insurance market has been
fragmented and expensive, for both domestic and foreign companies
alike.
State regulation encouraged many US insurers to remain focussed
on their local markets, and not seek diversification across borders. It
also led to a lack of diversification along product lines. For much of
the past 150 years, US insurers have tended to specialise in only one
line of business that is until after the Second World War when most
restrictions on multi-line underwriting were finally removed.
Historically, state regulators have focussed on solvency and
consumer protection, which has seen them oversee pricing,
availability of cover and claims. This has proved particularly relevant
in catastrophe-exposed states, especially those like California where
Insurance Commissioners are elected.
US insurance regulation has also historically had a political
dimension. Politics has also been a factor in the treatment of
foreign insurers, with regulators applying their own rules and capital
requirements for non-US companies.
To underwrite business in the United States, foreign companies
were forced to demonstrate their commitment and were required to
invest in US securities, a practice that would have particular relevance
during the 1927 Wall Street Crash and the two World Wars.
Harsh deposit requirements imposed by some states on foreign
insurers in the 1800s, dissuaded some from entering the market and
led many to participate only through reinsurance, rather than pay the
price of state regulation.
While state regulation encouraged the creation of state-based
local insurance markets, rather than a national one, insurance
supervisors have sometimes co-ordinated their efforts nationally.
In 1871 the National Association of Insurance Commissioners was
formed, which to this day continues to develop model laws and
provide a platform for regulators to discuss changes and communicate
with the wider insurance sector.
United States equalled that of the United
Kingdom, having been one-sixth of its
spend just thirty years earlier.
Although several associations
were established in the early 1700s to
provide care for widows and orphans of
their members, life insurance developed
at a much slower pace than property
casualty.
In 1812 the first real life insurance
company was formed in the United
States with The Pennsylvania Company
for Insurance on Lives and Granting
Annuities opened for business. Other
companies soon followed, and from
1870 to 1895, life insurance in force
increased nearly six-fold as companies
introduced industrial and whole life
policies.
Early foreign contributionForeign insurers gained a foothold in
the US market early on, so beginning a
lasting relationship—with all its ups and
downs—between the US market and
overseas insurers and reinsurers.
The United States was an important
market for some UK insurers in mid-
1800s, in particular for insurance
linked to the trade in cotton. However,
the period of Reunification after the
American Civil War, was to see many
more insurers from Canada, Germany,
Russia, Switzerland, as well as the United
Kingdom, attracted to the United States
by its growing population and expanding
economy.
Foreign insurers were soon writing
significant volumes of business in the
United States—by 1881, around 25% of
US fire premiums were underwritten by
foreign insurers—with some UK insurers
outgrowing their domestic US rivals.
Building reputationsBy 1913, a total of eighty-nine foreign
companies from fourteen nations, were
operating in the US. UK companies, in
particular, invested heavily in the United
States—according to some estimates US
THe FIRST dOmeSTIC FIRe And
mutual marine insurers were already well
established before the American War of
Independence (1775-1782), with at least
10 property companies created in the
two decades following the declaration
of Independence in 1776—including the
first US joint stock insurer The Insurance
Company of north America, InA,
founded in 1792.
more companies were to follow and
by the mid-1800s most US states had a
rich assortment of organisations writing
insurance.
The period following the American
Civil War (1861—1865), with the
opening of new territories in the
American West, saw the US enjoy one of
its most sustained periods of economic
growth, quickly becoming the world’s
largest economy by the end of the
century.
The non-life insurance market
also grew more quickly at this time. In
1880, per capita insurance spend in the
The US domestic insurance market pre-dates the founding of the nation itself, tracing its roots to Colonial trade with the United kingdom in the 1700s
[Right] dale Creek, Iron Viaduct,
Promontory, Utah:
Railroad expansion in the late 18th
century let the US economy develop
across the interior of the continent.
premiums accounted for 40% of British
premiums between 1870 and 1914.
US domestic non-life insurers were
also flourishing around this time, with
a few –such as InA—even venturing
overseas. But with good growth
opportunities at home, diversification
into markets outside the United States
was to remain limited, even after the First
World War.
US life insurers—that had seen
business in force grow seventy-six times
over in the second half of the nineteenth
century—were more successful in their
overseas expansion. The top three US life
insurers—equitable, new York Life and
mutual—were all active overseas.
No easy rideConducting insurance business within
the United States was never easy.
For much of its history, the US
insurance market has been fragmented
and highly regulated. Unlike other
markets, US insurance regulation
was, and continues to be governed
by a complex set of state and federal
rules, self-regulation and international
standards. (See box).
In addition to the relatively high cost
of doing business in the United States,
catastrophe and other losses meant that
profits were hard to come by. Although
every state had licensed foreign insurers
in 1914, fifty-three foreign insurers exited
the United States between 1861 and
1914.
Reinsurance— a European affairdespite America’s exposure to large
hurricane and earthquake perils, the
reinsurance market started slowly and
largely remained an activity of foreign
US consumers were quick to adopt technology, buying domestic appliances and, of course, the car. Automobile insurance increased with the rapid growth in vehicle sales...
Chapter One
The ‘Philadelphia Contributionship for the Insurance of Houses from Loss by Fire’ was the oldest property insurance company in the United States. It was organized by US statesman Benjamin Franklin
11
United States of AmericaFrom Emerging Market to Global Power
13
Piccap to go here
12
The earthquake, which is generally
regarded as a pivotal moment for the US
insurance market (see box), cost Swiss
Re around CHF 8.4 million, resulting in
the largest net property loss in Swiss Re’s
history as a percentage of annual net
earned non-life premiums.
For Swiss Re, the quake
demonstrated its fundamental
proposition to clients. By insuring the
insurer, Swiss Re could help them
withstand the losses of a ruinous
earthquake or fire.
Within four years of the earthquake,
Swiss Re opened its first branch in new
York and became an integral part of the
US insurance industry.
Rapid expansionSwiss Re’s decision to establish an
office on the 20th October 1919
proved to be good timing. The US
market economy was growing, and
the increasing awareness of potential
risks from disasters like the San
Francisco earthquake was a boon to the
reinsurance industry in the United States.
Opening a US branch signified
Swiss Re’s long term commitment to the
US insurance industry. It enabled Swiss
Re to position itself as a key player, allying
its fortunes to those of its US clients, a
factor that was to prove important in the
turbulent war years ahead.
The plan was to grow Swiss Re’s
fire treaty business and launch a new US
casualty reinsurer. Together with other
investors, Swiss Re launched the ground-
breaking european Accident Insurance
Co. Ltd.—in 1920, the first licensed
professional accident and casualty
insurer and reinsurer in the United States.
The outbreak of World War I in
europe in 1914 would lead to structural
changes in the US insurance market, as
well as transform Swiss Re’s position as
it helped fill the vacuum left by the rapid
decline of its competitors. The war would
see German insurers banned from the US
insurance and reinsurance markets, while
the Russian Revolution in november
1917 would see Russian insurers
withdraw from the market.
The US insurance market would
emerge from the War period in relatively
good shape, as domestic insurers
increased their market share. From
1910 to 1920, the four top domestic
companies. Overseas companies
accounted for 90% of reinsurance at the
end of the nineteenth century.
US insurers favoured other, often
less effective forms of spreading risk,
including co-insurance agreements
and insurance exchanges. US insurers
remained dangerously undiversified and
exposed to both man-made and natural
disasters, a fact reinforced by the losses
incurred in the Chicago and Boston fires
of 1871 and 1872, and later with the San
Francisco earthquake of 1906 (see box).
A place in the marketThe relevance of the US reinsurance
market was clear from an early stage in
Swiss Re’s development.
Its first foray into the country was
through reinsuring the US business of
its trusted partners, including Swiss
Re’s founding partner Helvetia in 1873
and German insurer Prussian national
Insurance Co. in 1880, which built a
substantial business in San Francisco,
regularly ceding business to Swiss Re.
Swiss Re’s focus on the fast
growing Californian market was to have
unfortunate implications for the company.
1929 CRASH: A Wake Up Call For InsurerTHE ExUBERANCE ANd oPTIMISM oF THE 1920S CAME To AN
abrupt end with the 1929 Wall Street Crash and the Great depression
of the 1930s.
The crash had huge implications for insurers, causing massive
losses from volatile investment markets and exchange rates, as well
as years of falling revenues. Longer term it also led to fundamental
changes in financial services regulation and had a profound affect on
the perceived role of the government and the private sector in social
welfare provision.
In the first decades of the twentieth century, US capital markets
came to lead the world. The country seemed to offer opportunities for
growth as well as a combination of stable exchange rates and a broad
range of securities to invest in.
Insurance companies benefited from a growing interest in equities,
with most fire companies enjoying double, and even triple, digit returns
on their investments. With 80% of fire insurers’ investments going to
financial markets, the bull market in insurance stocks became a self-
fulfilling prophecy.
during this time Swiss Re increased its weighting in equities,
buying stocks in railroad companies, as well as public utility bonds and
government and industrial debt. The reinsurer experienced significant
growth in its business during this period and was obliged by insurance
rules to invest a large share of its premiums in the US market.
When the music finally stopped in 1929, Swiss Re, like other
insurers, suffered losses as share prices plunged. The company
reported total write-downs of CHF 26 million between 1930 and 1938,
although the company was able to tap reserves held in Zurich– in 1931
some CHF 30 million was taken from the reserve pool to cover losses
on the asset side, almost wiping out the fund.
despite the losses, Swiss Re survived the financial crisis in good
shape, maintaining its high dividend and reporting profits throughout
the crisis.
[Above] Edwin Hürlimann, General Manager of Swiss Re between 1919 and 1930
14
days became a major problem for
insurers and resulted in off-putting higher
premiums.
The 1920s were to end with a crash,
signalled by the collapse of the US stock
market in 1929 (see box). The optimism
of the 1920s was soon replaced by the
Great depression of the 1930s, the worst
economic downturn of modern times.
From 1929 to 1933 US gross domestic
product halved from $104 to $56 billion.
Insurers were hit on two sides, with
investment losses from steep declines in
the stock market, and by falling demand
for insurance. As the economy slowed
and unemployment soared, casualty
insurance premiums fell 30% over the
same period. By 1934, fire insurance
premiums had fallen to the lowest level in
twenty years.
Like other sectors, US insurers
benefited from the interest in equities,
reporting double or triple digit earnings
on investments by the middle of the
1920s. Swiss Re’s expanding US
business meant it was also obliged
to invest more in US assets, and its
investment portfolio at the time included
a heavy weighting in railroad and public
utility bonds, as well as US state debt.
The length and severity of the
depression helped reshape American
attitudes to risks and insurance, setting
the stage for a blend of public and
private welfare provision. Poor economic
conditions and increasing regulation had
led many foreign insurers to leave the US
market.
Within a decade of the Wall Street
stock market crash, europe was again
plunged into war. Foreign insurers and
reinsurers, Swiss Re included, found it
increasingly difficult to communicate
with their overseas headquarters.
The political upheavals of World War
II had a dramatic effect on Swiss Re’s
business in the United States, where it
had become a well-established cog in
the insurance machinery. By 1941 the
Zurich-based company was the largest
fire reinsurer in the country, with net
premiums 50% greater than its nearest
rival.
The War made the transfer of
documents between Zurich as the
US subsidiaries impossible, and all
correspondence was carefully watched
under the terms of the 1917 espionage
Act. The crucial flow of cross-border
funds was also severely impeded by the
War, creating huge liquidity and foreign
exchange risks for international insurers
and reinsurers like Swiss Re.
One sign of Swiss Re’s commitment
to the US market can be seen in its plans
to transfer all US operations and assets
to a US entity, should the situation in
europe deteriorate. All shares in the US
operations were transferred to a holding
company held in trust by US citizens.
fire insurers collectively increased their
premiums by 150%. For Swiss Re, this
period would see it become established
as the leading professional reinsurer in
the US market.
In addition to the tragedy of
World War I, a catastrophic influenza
pandemic in 1918, later dubbed “the
Spanish flu”, was a reminder of the limits
of globalisation and the difficulty of
diversifying certain risks internationally.
Were such a pandemic to hit the US
economy today-where 30% of the
workforce became ill and 2.5% were to
die, the total cost would be around USd
700 billion.
US life insurers took a big hit,
although demand subsequently
increased, as did prices.
Roaring TwentiesThe 1920s witnessed the rise of a
particularly American phenomena,
the rise of the consumer culture and
the development of mass marketing.
This boosted demand for insurers, that
were already creating their own brand
of advertising, ensuring a period of
profitable growth for US carriers.
At this time Swiss Re was
reinforcing its leading position in the
US market, reinforcing marketing and
legal connections. As early as 1923 it
used north America in the name of its
operations.
US consumers were also quick
to adopt the latest technology, buying
radios, domestic appliances and, of
course, the motor car. Automobile
insurance increased with the rapid
growth in vehicle sales, although cars
proved easy to steal, which in the early
The 1920s witnessed the rise of a particularly American phenomena, the rise of the consumer culture. This boosted demand for insurers, that were already creating their own brand of advertising, ensuring a period of profitable growth for US carriers
99 YEARS: Disasters That Shook A Market
CATASTRoPHIC EVENTS, WHETHER natural
or manmade, have been a defining feature
of the US insurance market from its earliest
days.
From the fires that destroyed many US
cities in the 1800s, to the San Francisco
earthquake in 1906, Hurricanes Betsy in
1965 and Katrina in 2005, and the World
Trade Centre terrorist attack in 2001,
catastrophes have helped drive demand in
the world’s largest insurance and reinsurance
market.
These events, costly in both economic
terms and loss of life, highlight the potential
scale and concentration of catastrophe losses
in the United States, as well the need for
foreign capital and expertise.
The US is particularly exposed to natural
disasters—from the powerful hurricanes that
have hit the Gulf of Mexico states and the
East Coast to earthquakes that have rocked
California, Washington and Missouri, as well
as less quake prone cities like New York
and Boston.
There is also a history of costly manmade
disasters. Growing urbanisation in the
1700 and 1880s, and the preponderance
of wooden building, led to devastating fires
in many US cities, including New orleans
(1788 and 1794), New York (1776 and 1835),
detroit (1805) Pittsburgh (1845) Seattle
(1889). In more recent times,
The San Francisco earthquake was one of
the first natural disasters to have a deep and
lasting affect on the US insurance market.
The 7.9 magnitude earthquake that shook
San Francisco in 1906 was a turning point in
US insurance history. It caused around $10
billion of damage at current dollar value, with
two thirds of the damage being caused by
the fires that swept through the cities largely
wooden buildings.
Forty-three companies paid out $4.9
billion of claims at today’s values, equal to the
insurance market’s entire forty-seven years
of profit. Although most foreign insurers
weathered the catastrophe better than their
US counterparts, they were also hit by big
losses.
In addition to the financial consequences,
the quake also exposed a lack of insurance
and reinsurance standards in what was still a
localised US insurance market.
Although some 90% of houses in San
Francisco carried fire insurance, earthquake
risk was not considered insurable and
therefore not covered,
while many companies excluded fire
following an earthquake.
As a result, many insurers paid nothing
in claims, while others went bust or tried to
renegotiate contracts.
one of the most important lessons of the
quake was the need for diversification—those
countries with greater financial strength and
international diversification, showed more
resilience and ability to pay claims.
15
Hurricane Betsy of 1965 makes landfall in Florida
[Left] Charles Simon— General Manager of Swiss Re between 1900 and 1919
Panarama of the rebuilding of San Francisco three years
after the earthquake of 1906
16 17
cities, the space race and
satellite technology, as well
as giant strides in medical
sciences and the more
recent development of the
internet. Whole industries
were developed, including
the earliest commercial
airline companies,
energy firms, global
consumer brands and the
entertainment industry.
Insurers build on economic successOn the back of growing consumer
demand and the success of US business,
the domestic insurance market grew
from strength to strength.
As a percentage of disposable
income, Americans were spending 50%
Mature Market:Innovation, expansion, prosperity but also market distortions
THe exPAndInG US eCOnOmY
and developing consumer market
provided fertile ground for the US
insurance industry, which began to
take on a new sophistication, reflecting
developments in risk management and
actuarial sciences.
experiencing a boom in demand
for insurance, American insurers grew
from strength to strength, but increasing
prosperity brought about changing
social attitudes, market distortions and
some volatility.
Blinded by high investment returns
and over confidence, the US insurance
industry under-priced risk at a time of
rising claims inflation and unfavourable
developments in the legal system. The
resulting liability crisis hit US insurers
and their reinsurers with massive
unexpected losses, causing a ripple
effect that was felt by insurance markets
around the globe.
The rise of American technology and culture Post war America was to prove an
economic powerhouse, fuelling the
global economy and breaking new
ground in terms of technology and
culture.
The United States offered a strong,
liberal and stable market in the uncertain
Cold War era. While large parts of
the world had slipped behind the Iron
Curtain or were struggling to emerge
from colonial rule, America was buoyed
by new confidence.
After the set-back of the Great
depression, the United States was again
prospering, enjoying growth levels last
seen prior to the First World War. From
1950 to 1973, world trade saw exports
outpace economic growth by a factor
of two.
For the entire twentieth century
the US was to lead the world in
technological innovation, manufacturing
and consumer goods and services.
Industrialisation took on a new
form in the US with the likes of Henry
Ford introducing the concept of mass
production, while the growth in the
consumer market was unrivalled.
In the first decades of the twentieth
century, US consumers were keen to
own their own motor cars and were
quick to embrace new technologies,
whether they were the latest household
appliances, television or computers.
The post war years saw rapid
growth in transport, the rise in mega
The post war years saw rapid growth in transport through motor cars and aviation, the rise in mega cities, the space race and satellite technology, as well as giant strides in medical sciences
DEVELOPMENT: Liability crunch timeTHERE WAS A HEAVY PRICE To PAY FoR THE ECoNoMIC ExPANSIoN
in the US during the 1950s and 1960s, both in terms of the
environment and the runaway tort system.
A combination of new technologies and a huge increase in
compensation awards by the courts created a traumatic time for US
insurers.
The combination of tort and class actions favoured strong
consumer rights and made it easy and potentially also quite rewarding
to sue. Together with a broadening of evidential standards and
doctrines of culpability, the number of suits dramatically increased, as
did the size of awards. Strict liability and the need to only establish a
degree of guilt made US companies an easier source of compensation.
during the second half of the twentieth century, US tort costs rose
from 0.6% of GdP to 2.2%. In the early 1980s some US insurers were
spending as much as 25% of their premiums on legal expenses, up
from 5% in 1960.
Insurers had written business on completely different assumptions
of the likely frequency and cost of claims. The expanded concept of
liability and the long-tail nature of casualty insurance meant that US
insurers were hit with claims in the 1980s they had not anticipated
or priced for when the policies were underwritten in the 1960s and
1970s.
The largest losses were for environmental, pollution and health
hazards, with asbestos related claims being the largest single cause.
This mainly US phenomenon—of emerging liabilities and
huge increases in awards—was to have global ramifications, with
international insurers and reinsurers reporting losses and a reduced
appetite for casualty business.
The crisis in liability insurance came to a head in the 1980’s,
resulting in a number of insurers going bust while others withdrew
cover or stopped writing casualty lines altogether. The dramatic
reduction in the availability of casualty insurance and skyrocketing
of insurance prices that followed had serious consequences for US
businesses and consumers.
Medical malpractice and product liability were the first to
suffer but workers compensation, general liability and then later
professional liability and directors’ and officers’ insurance were hit
with overwhelming claims. The cost and lack of liability insurance,
especially in the US healthcare sector, became a political hot potato. It
eventually led to tort reform in the late 1980s, which was successful in
reducing the worst excesses, but a shortage in insurance capacity was
to remain for some time.
The experience of asbestos, in particular, alerted insurers to
the huge potential risks from emerging or unexpected liabilities and
shifting legal positions. To this day, foreign reinsurers remain mindful
of the cost of under-pricing casualty reinsurance and the importance of
keeping track of emerging risks like nano technology or biotechnology.
The liability crisis also had long term implications for commercial
insurance in the United States, encouraging insurers and companies
alike to look at new ways of managing and retaining risk. Increased
retention levels and consolidation among US insurers produced a long
term decline in demand for casualty reinsurance in the United States .
The liability crisis led many large US companies to retain more
risk and self-insure, and even as the casualty market showed signs
of improvement in the mid-1990s, risk retention mechanisms would
remain a viable alternative to US organisations.
Chapter Two
more on life, annuity and health
insurance in the twenty years after
the end of the war. By 1965, the
number of life insurance contracts
was almost three times higher than
in 1945.
motor insurance also grew
hugely, with premiums rising ten-
fold in the twenty-five year period
following 1945.
demand for commercial
insurance also increased with the
success of US business, but the scope
of challenging engineering projects,
from ever larger and more complex
factories, bridges and aircraft, were
increasingly beyond the capacity and
skills of a single insurer.
Such risks required a new level of
industry expertise and risk management
that most US insurers did not possess. A
few large and expert reinsurers like Swiss
Re were able to extend their capacity
to reinsure these single, large risks in
collaboration with insurers and large
corporate clients.
Home market opportunities In contrast to the pre-1914 expansion
overseas by US life insurance companies,
post war insurers remained firmly
focussed on opportunities at home. With
a strong domestic market, US insurers
generally lagged behind US companies in
other sectors, like automotive, that were
expanding overseas, growing increasingly
multinational.
There were a few exceptions, such
as American International Group (AIG),
American Foreign Insurance Association
(AFIA) and InA which continued to
build on their overseas ventures in the
[Right] Piccap to run here
The decades following the Second World War were to be a golden age of growth for the United States that saw a flowering of American culture, business and technology
18 19
entrants and high investment returns
stoking competition.
There were still opportunities for
reinsurers. Reinsurance accounted for
just 3.6% of total nonlife premiums in
the mid-1980s and US companies –
which faced increasingly complex risks
– sought the help of technically capable
global reinsurers like Swiss Re.
Swiss Re was also able to
increasingly benefit from economies
of scale, such as increased technical
sophistication and product development.
However, the reinsurance market
remained competitive and few
recognised that fundamentals needed
to change.
Counting the cost In 1979 only three of the top 13
reinsurance companies operating in
the United States had a combined ratio
below 100%. Unprofitable underwriting
was being supported by unsustainable
high investment returns, and in particular
stock market returns.
Insurers continued to compete
aggressively in the 1980s, cutting prices
and taking on more risk. Just as rates
were falling, demand for commercial
insurance exploded.
new inexperienced entrants were
attracted to the commercial insurance
market, fuelling competition and driving
down rates. And so called cash flow
underwriting – with its focus on volume
rather than profit – became popular.
At a time of double digit interest rates,
insurers believed that they could offset
underwriting losses with investment
returns.
But as the losses rolled in,
approximately half the reinsurers in
the market had left by the mid-1980s,
putting pressure on those that remained
to take on more risk and support their
clients.
Spiralling liability costs and
competitive pressure on pricing hit
reinsurers like Swiss Re hard in the
US. Its business was focussed on large
carriers, particularly foreign players that
were especially hit by asbestos liability
and pharmaceutical product liability
claims.
The Swiss reinsurer also typically
underwrote pro rata reinsurance, which
meant that it shared the losses of clients.
even excess reinsurance, which is only
triggered by very high losses, produced
unexpectedly large claims, some dating
back to the 1940s and 1950s.
The liability crisis also added new
administrative costs for reinsurers, as
disputes became bitter and involved
teams of lawyers. Litigation between
insurer and reinsurer, once a rarity, was
frequent and disputes became more
difficult to resolve as the focus moved to
a legal interpretation of contracts, rather
than one based on good will.
Staffing had to increase at Swiss Re
to deal with the increasingly complex
claims. A whole new department was
created to audit client data and the
claims unit grew from 12 in the late
1970s to 72 people by the mid-1990s.
A change of strategy - such as shift
to writing excess reinsurance, which
generates higher returns from fewer
expected losses – was difficult. excess
reinsurance generates less premium
volume, which was needed to help
smooth the loss ratios - Swiss Re spent
much of the 1980s writing just enough
new casualty business to keep pace with
its growing losses.
But despite the challenges, Swiss
Re’s nonlife net premiums grew in the
1980s from USd 4 billion to USd 7
just the wrong time.
US courts were strengthening the
concept of liability, making companies
and their insurers more culpable
for unforeseen mistakes, as well as
awarding greater levels of compensation
to consumers.
Reinsurers like Swiss Re were
to suffer losses far greater than any
expert would have forecast, leading to a
period of insurance market volatility not
previously seen in the United States.
Opportunities and challenges despite emerging problems in the liability
insurance market, the US insurance
market continued to grow overall
throughout the 1970s and 1980s. From
1960 to 1985, property and casualty
insurance premiums increased from
USd 15 billion to USd 144 billion. Life
insurance premiums grew at an even
more impressive rate over the same
period, up from USd 586 billion to USd
6 trillion.
The growth was good news for
reinsurers like Swiss Re, but it also
meant that life was about to get a lot
harder. Larger insurance companies and
corporations were able to retain more
business and self-insure through the
increasingly popular option of a captive
insurer. Competition was also heating
up for established reinsurers, with new
US life and nonlife premium revenues
increased six- and tenfold respectively.
The company’s US business accounted
for 27% of the group’s total premiums
revenue, almost twice that of the next
largest country, Germany, and as much
as France, Belgium, Switzerland and the
United Kingdom combined.
The turning tideAmerica’s post war economic boom was
both an opportunity and a threat to the
country’s insurers and reinsurers.
The expansion in the US economy
created opportunities to grow for
insurers. However, direct insurers
not only wrote more business, they
also broadened cover, often without
corresponding rate increases or a proper
understanding for the underlying risks.
Concerns over the quality of
business being written was to become
a big issue for reinsurers like Swiss Re,
that were keen to support insurers in
expanding their portfolios, but were wary
of the potential risks.
Commercial insurance premiums
doubled in the 1970s, with general
liability and malpractice premiums
increasing by some 150%. Reinsurance
premiums also tripled at this time.
However the 1970s was to be
a turning point for the US insurance
market. The favourable claims and
investment experiences of the 1950s
and 1960s left the insurance market over
confident and ill prepared for the losses
and inflation turmoil that followed.
The 1960s saw a breakdown of
international monetary agreements
reached in the immediate aftermath
of the war under the Bretton Woods
System. The country was entering a
long period of economic and business
uncertainty, marked by rising inflation
and volatile exchange rates, a major
problem for liability insurers that accept
premiums at a point in time, but may not
pay claims for many years after.
Naïve capacityThe strong profitability of the 1950s and
1960s gave way to a turbulent period
for insurers in the 1970s and 1980s.
Fierce competition and high investment
returns had helped drive down premium
rates and blinkered insurers to long term
technical profitability of the business
being underwritten.
Insurers took their eyes of the ball at
interwar period. AIG, in particular, grew
into the world’s largest non-life insurer,
becoming the byword for international
diversification and innovation, until its
near-collapse in the 2008 financial crisis.
However, despite improving access
to newly liberalised foreign markets,
there was just one US insurer in the ten
largest multinational insurers in 2003,
compared with three Swiss and two
German.
As US insurers grew stronger
in the post war economic boom, the
participation of foreign insurance
companies reduced. Although some
UK insurers were still among the top
twenty US insurers, foreign companies
represented just 170 out of 4,800 US
insurers in the 1970s.
Foreign reinsurers, however,
continued to play an important role in
the US reinsurance market. By 1977
US insurers ceded over USd 1.4 billion
to foreign reinsurers and assumed USd
1 billion, a threefold increase in seven
years.
Swiss Re reinforces its core position Swiss Re emerged from the Second
World War in a strong competitive
position in the United States. The
company maintained its wartime
trust holding structure, reinforcing its
American branding, and raised the level
of the US company’s capital.
during the 1950s and 1960s Swiss
Re rationalised its US business, spinning
off its Canadian business into a new unit
and opening offices in Atlanta, Chicago
and San Francisco.
With a new geo-political landscape,
Swiss Re sought to further diversify,
opening offices in Australia, South Africa
and across Asia. The development of
the global network benefited US clients
as Swiss Re was better able to further
diversify US natural catastrophe risks
by writing exposures like Japanese
earthquake, risks that had a low
correlation to those in the United States.
By the end of the 1960s Swiss
Re was able to look back at a very
successful 15 years. After virtually no
growth during the war years, Swiss Re’s
Piccap to go here
Piccap to go here
20 21
billion, as it differentiated itself from other reinsurers by its financial strength
and by offering access to its global expert underwriting and claims.
Storm of the centuryUp until Hurricane Katrina in 2005, the most expensive natural disaster in US
history was Hurricane Andrew in 1994, which caused some USd 22 billion in
damage. With winds in excess of 200 mph, Andrew produced over 700,000
claims across thousands of square miles.
Just two years after Hurricane Andrew, a strong earthquake hit the
California community of northridge, just 20 miles north of Los Angeles,
causing some USd 20 billion in damage.
The storm, one of the most powerful to hit Florida in
the second half of the twentieth century, and the quake
were a wakeup call for insurers. They highlighted the
underappreciated risks of increasing concentrations of
property values in catastrophe exposed parts of America,
notably the hurricane prone Gulf of mexico and quake prone
California.
The insurance industry’s response to Hurricane Andrew
was swift and its effects long lasting. A number of smaller
insurers became insolvent and local subsidiaries of national
carriers required capital injections to keep them afloat. The
market for residential and commercial property coverage in
Florida all but dried up, and catastrophe reinsurance prices
soared and available limits greatly reduced .
Insurers realised they had underestimated the likelihood
and potential costs of a large natural disaster hitting a
populated area. Future hurricanes and earthquakes would
require insurers to significantly improve their understanding of
exposures and the potential impact on their portfolios, as well
as look at new ways to transfer the risk.
In particular, Andrew was a boost to the nascent
catastrophe modelling industry, and led Swiss Re to increase
its investment in its own models and in-house expertise – the
reinsurer now employs modellers, climatologists and other
scientists to better understand what drives hurricanes and the damage they
cause.
Hurricane Andrew was also to kick start a new property catastrophe
insurance and reinsurance market in Bermuda – Swiss Re helped form
Partner Re, one of several pure catastrophe reinsurers established in Bermuda
in the years following Andrew.
Significantly, Andrew ushered in the age of capital markets in insurance
risk. The hurricane encouraged insurers and reinsurers to turn to new capital
market products like catastrophe bonds, an area that Swiss Re has built
considerable expertise in the intervening years.
Investing in the US marketIn the mid-1990s Swiss Re sold its holdings in primary insurance and service
companies in order to reinvest and focus on its core reinsurance business, as
well as develop capital market solutions like cat bonds.
The goal was to become the number one global reinsurer, and the US
market was key to achieving this goal.
divestments freed up CHF 5 billion, which Swiss Re reinvested into
further growth of the life business, increasing the global non-life operations
and the development of allied financial services. The trend towards more
costly catastrophes and opportunities in alternative risk transfer solutions
made these attractive areas for investment.
At the same time the US operations became more integrated with the
group as Swiss Re began to operate more as a global business, under as
single brand and a single capital base. US senior managers became a familiar
part of Swiss Re in europe as their talent and experience was shared by the
rest of the business.
The 1990s saw Swiss Re invest further in its US operations, boosting
capital, rationalising legal structures, as well as investing in staff, IT and data
collection. Around this time Swiss Re moved its US head office from Park
Avenue in new York to larger modern premises in Armonk Westchester,
which were designed to promote a more collaborative work environment.
As the twentieth century came to a close Swiss Re’s US operations
accounted for 30% of the reinsurer’s global business, with expectations that
this would grow to 60% over time.
DEVELOPMENT: Risk ManagementTHE REVoLUTIoN IN RISK MANAGEMENT
THAT GoT UNdERWAY IN the United States
in the 1960s and 1970s went hand-in-hand
with developments in technology. Almost all
new theory on pricing risk in the latter part
of the twentieth century emanated from the
United States, with lasting implications for
risk management and insurance around the
world.
The growing size and complexity of
US business and technology required a
new approach to risk, and the role of the
risk manager was created. US business
culture, with its emphasis on education
and technical development, encouraged a
professional approach to understanding risk,
its identification, mitigation and potential
transfer to third parties like insurers.
The United States is now home to one
of the world’s most developed communities
of risk managers, represented by the Risk
and Insurance Management Society (RIMS).
Established in 1950, RIMS serves more
than 10,000 risk management professionals
around the world through 81 chapters across
the United States, Canada, Mexico and Japan.
Working alongside their brokers and
insurers, US risk managers have been
pioneers in risk management and the transfer
of risk to third parties. US companies are
among the biggest users of captive insurers
and are often the first to embrace new
insurance products, such as directors’ and
officers’ insurance, environmental impairment
liability and more recently cyber insurances.
US companies were also early
beneficiaries of globalisation, with motor
manufacturers being among the first to start
operating overseas. The increasing size and
complexity of risk, as well as the expansion
into foreign territories was to lead to many
innovations in commercial insurance, such
as multinational insurance programs and
eventually the use of bespoke structured
solutions.
DEVELOPMENT: Embracing Capital MarketsIN THE WAY THAT CAPTIVE INSURANCE CoMPANIES BECAME A
viable concept with the development of actuarial practices, advances
in statistical modelling and innovations in financial products allowed
insurers and reinsurers to explore alternative risk transfer products in
the 1980s and 1990s.
Insurers began to develop potential new commercial insurance
products that ranged from multi-line multi-year insurance policies to
those that incorporated financial products like derivatives or swaps. For
example, an insurer could offer cover for a combination of insurance
and financial market risks. Such a contract that could cover potential
catastrophe losses and a fall in equity markets.
Some of these experimental products were more successful than
others. But the most enduring has been the catastrophe bond, which
has grown into a market in its own right, attracting investors and
insurers with the potential to transfer nonlife and life insurance risks
between the two largely uncorrelated markets.
The first catastrophe bond was issued for a life insurer in the
1980s, but it took Hurricane Andrew in 1992 and the resulting shortage
of reinsurance capacity to really get the insurance linked securitisation
market going. The catastrophe made insurers and reinsurers look at
new ways to protect their balance sheets against major catastrophes
like a hurricane or earthquake.
US companies used their risk management and financing skills
to package insurance risk and transfer it to capital markets. The first
catastrophe future contracts were launched by the Chicago Board of
Trade in 1992, and while the venture was ultimately unsuccessful,
it was one of the first of many innovations to trade cat risk in capital
markets.
Swiss Re was an early explorer of capital markets and innovative
risk transfer techniques. In the 1980s it founded New York-based Atrium
to look at new ways of assessing and transferring risk and in 1993
Swiss Re established a new division – called Alternative Risk Transfer –
to tap into new markets for handling risk.
The reinsurer established a relationship with the Zurich-based
investment and retail bank Credit Suisse to develop new products
and meet the insurance and financing needs of financial markets and
Fortune 500 companies.
The lines between banking and insurance were beginning to
blur and it was becoming possible to transfer exposures like natural
catastrophes, life risk and even motor to capital markets, as well as to
combine insurance and capital market products into new solutions for
large companies and public sector organisations.
Many leading insurers and reinsurers have embraced ILS as a
way to access capital market protection on a multi-year basis and at a
secure price. This has proved particularly relevant for peak risks like US
Hurricane and Earthquake, Europe Windstorm and Japan Earthquake,
where availability and price of cover can be subject to volatility
following a large loss event.
ILS have also proved popular with investors, the numbers and
diversity of which has been increasing over the years as the sector has
matured. Investors have found ILS an attractive prospect offering higher
yields and an asset class uncorrelated to other financial market risks.
In addition to finding solutions for its clients, Swiss Re has also
diversified in portfolio by issuing billions of dollars of exposure to capital
markets through catastrophe bonds, including pioneering mortality and
longevity insurance linked securities.
22 23
Interior of a lobby at the Swiss Re North American corporate headquarters in Armonk, New York State
Piccap to go here
during the second half of the last century it became increasingly important to advertise directly to the consumer. Swiss Re at it’s 75th anniversary emphasised it’s longevity and olf-fashioned values.
[Left] during picture research, in the Swiss Re graphics library, for the production of this history found this press advert for the 75th anniversary celebrations of North America Re. Closer inspection of the artwork revealed a mistake in the photography that was chosen. To illustrate the year1984, a photograph of the 100m final from the olympic Games was used, but unfortunately it was an image of the wrong Games instead being the finish of the 1980 100m in Moscow...
COMMUNICATION: Advertising
24 25
HURRICANES: Testing The Foundations of Insurability
THE dEVASTATING RUN oF HURRICANES BETWEEN 2004 ANd 2008
were a reminder of US vulnerability to powerful storms.
The past 150 years has been marked by a number of destructive
and fatal storms along the US East and Southern coasts.
The period of intense hurricane activity in the first decade of the
twenty-first century was unparalleled in modern times, raising serious
questions over the affects of climate change, the potential for even
greater losses caused by natural catastrophes and ultimately their
insurability in the future.
Storm losses have also risen in more recent times as the
concentrations of valuable property in hurricane exposed states like
Florida and Texas has increased along with the population shift toward
warmer coastal areas. Where once there was little but swamp lands,
major cities like Miami have grown in the past 150 years.
The power of Hurricane Katrina in 2005 shocked US insurers,
reinforcing some of the lessons of September 11 and reminding
insurers and reinsurers of the importance of identifying correlated
losses and in controlling their accumulated exposures.
As with the San Francisco earthquake almost 100 years before,
there was much uncertainty over what damage was covered by
insurance and what was not. Hurricane Katrina generated a swell of
litigation, much of it centred on whether damage had been caused
by the storm winds, which are covered under standard homeowners
insurance policies, or the flood, which is not.
As well as making insurers refocus their underwriting analytics on
their accumulated exposures, the string of hurricanes between 2005
and 2008 was a boon to the growing market for catastrophe bonds. In
2007 the catastrophe bond market enjoyed its best ever year, issuing
some $8.5 billion of protection, much of which was for US hurricane
and earthquake perils.
The insurance and reinsurance market in Bermuda was also to
benefit from the major losses in the first decade of the twenty-first
century. The Atlantic island began to attract insurers and reinsurers
of US risk in the liability crisis of the 1980s, and following Hurricane
Andrew in 1992, when some of today’s mid-sized reinsurers were
founded, some with partial funding from Swiss Re investments.
As insurance and reinsurance capacity became constrained
after the attack on the World Trade Centre, and again after Hurricane
Katrina, Bermuda became the focal point for start-up companies
and new capacity entering the market through so called side-car
arrangements.
The increased cost and frequency of Atlantic hurricanes, against
the backdrop of global climate change, caused many US companies to
reassess their approach to weather related catastrophes, implementing
risk reduction measures and purchasing greater levels of insurance.
Reinsurers called for the principle of risk based pricing to be
maintained, so those that choose to build along hurricane exposed
coastal areas are expected to pay higher premiums.
Hurricane Katrina also accelerated developments in the
catastrophe modelling arena, which was created in the wake
of Hurricane Andrew. With each storm, catastrophe modellers
incorporated new learning, such as the potential damage of storm
surge following Hurricane Katrina and the greater than previously
realised potential damage inland following a major hurricane.
26 27
the true value of insurance as a
mechanism for society and individuals to
manage risk and cope with unexpected
disasters.
Connectivity in a globalized worldIn many ways the start of twenty-
first century was a time of optimism.
The benefits of globalisation and
technological progress were having a
dramatic effect on the lives of millions
around the globe, and international trade
meant that the world’s economy was
growing.
Unfortunately the optimism proved
a false sense of certainty and was soon
overshadowed by fear and uncertainty.
The terrorist attack on the United
States of September 11, 2001, claimed
the lives of almost three thousand people,
many of whom worked for US insurance
and broking firms. In addition to the tragic
loss of life, the events of September 11
heralded a period of political volatility that
has lasted until the present day.
As well as sharing in the emotional
trauma of the destruction of the World
Trade Center, the insurance industry
shouldered much of the economic
burden. Insurers paid an estimated USd
23.8 billion, the most costly insured man-
made disaster ever and, at the time, the
second most expensive insured loss after
Hurricane Andrew.
The collapse of the World Trade
Centre was to show insurers and their
clients just how much the world had
changed. It highlighted a growing
global dimension to risk with more
interconnectivity than had been seen
previously—or in insurance terms,
demonstrating risk accumulation and
correlations previously unseen.
Interconnected risks The loss itself was highly complex,
leading to large claims for a number
of seemingly unrelated risks, including
aviation, property, liability lines, business
interruption and life insurance. In
addition, losses and potential exposures
were not confined to new York—airlines
were grounded, restrictive security
measures put in place and events were
cancelled throughout the US and around
the world.
The size and complexity of losses
were to make companies think differently
about risk going forward. Insurers had
suffered losses across different lines of
business and geographies, experiencing
unexpected correlations of risk. Also,
although the stock markets remained
reasonably robust in the aftermath of
9/11, the terrorist attack brought the
global economy to a grinding halt,
creating uncertainty for global equity
markets.
Insurers quickly realised that they
could no longer offer terrorism insurance
on the same terms as in the past. Once
offered as a blanket cover with property
insurance—and with little consideration
for price and accumulation of exposure—
terrorism cover was withdrawn by all but
a handful of specialist insurers.
The aviation and property insurance
The world at the turn of the twenty-first century was very different to that of 150 years ago, but many of the challenges remained
THe FIRST deCAde OF THe TWenTY-
first century played host to a series of
natural and man-made catastrophes.
It included two of the most costly
catastrophes ever, the terrorist attack
of September 11 and Hurricane Katrina
2011—events that raised many questions
also for insurer, highlighting the
magnitude of potential of losses and the
limits of insurability, the accumulation and
correlation of risks in a globalized world
and also the vulnerability of modern
society to large risks and its changing risk
perception.
The string of natural and manmade
catastrophes in the United States in the
first part of the twenty-first century had
global repercussions. It was a wake-up
call for the potential size and unexpected
nature of such exposures, as well as the
complexity and interconnectivity of risk in
the modern day world.
Risks on a truly global scale were
beginning to crystallise, with concerns
growing for the implications of climate
change, availability of resources and
the world’s aging population. The world
seemed to be more interconnected,
an issue resonating through all large
catastrophe events in the early twenty-
first century—starting with 9/11, followed
by the bust of the dotcom bubble, and
most apparent with the financial crisis of
2007/08.
The US insurance industry proved
relatively robust and financially strong
through all these crises—with some
isolated yet partially high profile
exceptions. Yet again, as had been the
case in 1906, the industry demonstrated
Interior of a lobby at the Swiss Re North American corporate headquarters in Armonk, New York State
Twenty-First CenturyThe Limits of Insurability
Modern Times
Catastrophes test limits of insurabilityThe world at the turn of the twenty-first century was very different to that of 150 years ago, but many of the challenges remained.
The first decade of the twenty-first century played host to a series of natural and man-made catastrophes. It included two of the most costly catastrophes ever, the terrorist attack of September 11 and Hurricane katrina 2011 – events that raised many questions also for insurer, highlighting the magnitude of potential of losses and the limits of insurability, the accumulation and correlation of risks in a globalized world and also the vulnerability of modern society to large risks and its changing risk perception.
The string of natural and manmade catastrophes in the United States in the first part of the twenty-first century had global repercussions. It was a wake-up call for the potential size and unexpected nature of such exposures, as well as the complexity and interconnectivity of risk in the modern day world.
Risks on a truly global scale were beginning to crystallise, with concerns growing for the implications of climate change, availability of resources and the world’s aging population. The world seemed to be more interconnected, an issue brought sharply into focus by the financial crisis of 2007/08.
Until the financial crisis, the US industry proved robust and financially strong through all these crises. Yet again, as had been the case in 1906, the industry demonstrated the true value of insurance as a mechanism for society and individuals to manage risk and cope with unexpected disasters.
Chapter Three
Insurers realised that they could no longer offer terrorism insurance on the same terms as in the past. Once offered as a blanket cover with property insurance—and with little consideration for price and accumulation of exposure—terrorism cover was withdrawn by all but a handful of specialist insurers
The 21st century
28 29
WORLD FINANCIAL CRISIS: Credit ContagionFoR THE GLoBAL BANKING SECToR THE FINANCIAL CRISIS oF
2008 was a catastrophe, and for the real economy it proved to be
the most severe decline experienced since the end of the 1920s
and 1930’s. Insurers, however, were better prepared.
They benefited from the measures introduced as a
consequence of dotcom bubble, which had made their asset
portfolios more robust against stock market volatility.
The Lehman crisis affected insurers quite differently to
investment banks. Insurers greatly differ from banks in terms
of their business model and regulation, and this helped them
weather the financial storm unleashed by the crisis in the US
subprime mortgage market and failure of Lehman Brothers in
2008.
The 2008 crisis demonstrated that insurers did not pose a
systemic risk and that they were not exposed to the same liquidity
issues as banks. Confidence in the insurance business model was
bolstered, but there were lessons for the sector, namely in the
areas of regulation and risk management.
The insurers caught in the financial storm of 2008 fell into
two camps – financial guarantee insurers and those that had
participated in banking-like activities, such as credit default swaps
and derivatives. However, the vast majority of insurers in the
United States and elsewhere, experienced few issues beyond the
impact of volatile investment markets.
Insurance regulation and industry practices require insurers
to hold capital in excess of their liabilities, often at a subsidiary
or local level. The industry business model, which sees premiums
paid upfront in return for a promise to pay valid claims, is not
exposed to the same liquidity risk of banks. While a bank can face
a run on deposits, policyholders are not so easily able to demand
a return of premium from an insurer.
However, the crisis had implications for insurers. It
alerted policymakers and regulators around the world to the
need for regulatory standards and increased cooperation
between supervisors. It also reinforced the need for better risk
management and governance, reflected in insurance regulatory
reform in both Europe and the United States.
The main regulatory response to the crisis in the United
States, The dodd–Frank Wall Street Reform and Consumer
Protection Act, bought about sweeping reform of banking, as
well as establishing a Federal Insurance office to collect data on
insurers and recommend changes to state regulation of insurance.
despite a tightening of regulatory oversight, the crisis
highlighted strengths in the insurer business model and showed
that insurers posed little systemic threat to the financial markets,
nor are they exposed to the same liquidity issues as the banks.
It also reaffirmed some of the fundamentals of reinsurance:
understand the underlying risks; challenge models that suggest
the future will follow the past and give due respect to improbable
‘black swan’ events.
markets, however, were quick to respond
with alternative solutions, and the
standalone terrorism market was borne.
Over time the standalone terrorism
market was to grow into a broader
product for terrorism and political
violence with a number of insurers
providing significant capacity. But in
2001 the world looked very different, and
very little cover was available, and what
limited insurance there was came at a
very high price.
In the immediate aftermath of
September 11, the threat of further
terrorist attacks was very real, but risk
was almost impossible to quantify. Swiss
Re and other US insurers emphasised the
need for terrorism exposures to be limited
and matched by adequate premiums if
the risk was to be transferred.
Insurers called on the government
to limit their exposures, enabling them to
offer more meaningful levels of terrorism
cover. The solution, the Terrorism Risk
Insurance Act (TRIA) was signed into US
federal law in 2002, providing a state
funded reinsurance backstop. Initially
TRIA was a temporary measure to allow
insurers to develop a long term solution,
but the Act has since been extended
twice and will next expire in 2014.
Confluence of lossesWhile the magnitude of the loss was
unexpected, so was the way insurance
contracts responded.
Claims made for the events of
September 11, 2001 highlighted
weaknesses in commercial insurance
contracts in the US and international
markets. The World Trade Center loss was
to lead to one of the biggest insurance
disputes of all time, forcing the industry to
change practices and contract wording
that had created such uncertainty of
cover (see box).
The destruction of the World Trade
Center was not the only issue for US
insurers and their reinsurers in the first
few years of the twenty-first century–
financial market volatility and the US tort
system were also causing immediate
concerns, while the ever present risk
of Atlantic hurricanes was also soon to
come into play.
At the close of the twentieth century
the US insurance industry was still reeling
from the liability crisis, which had caused
many carriers to increase their reserves.
Asbestos claims had yet to hit their
peak, and the US tort system and a
THE WTC LITIGATION: The Industry’s Largest DisputeTHE dESTRUCTIoN oF THE WoRLd TRAdE CENTER SPARKEd A MoRE THAN FIVE YEAR
coverage dispute, the largest single insurance dispute in history, between the building’s
leaseholder, Larry Silverstein and its insurers.
The collapse of the World Trade Center led to a number of disputes, with differing
results.
A risk as large as the World Trade Center required a number of insurers and reinsurers
to provide the huge sums insured. In fact, the WTC was leased by the New York real estate
developer Larry Silverstein in July 2001 and insured for $3.5 billion with 22 insurers.
However, when the terrorist attack of 9/11 happened, the contract wording for the
insurance policy had not yet been finalized and the various insurers, which were already on
the risk, used differing policy wordings, some of which provided more clarity than others.
Contract wording around whether the terrorist attack on the twin towers of the World
Trade Center constituted a single insured event, or two separate events, would prove crucial
to how much insurers would eventually pay.
The leaseholder, Larry Silverstein, claimed that insurers owed $7 billion, although in
2004 two federal juries said Mr Silverstein was entitled to a maximum of $4.68 billion in
insurance payments.
Led by Swiss Re, which had written a quarter of the $3.5 billion of insurance property
cover for the World Trade Center, a group of insurers finally won their case when a New York
jury confirmed the attack was one, and not two events, as the building’s owners claimed.
In separate trials a further nine insurers that had used different policy language, were
found to owe double their policy limits.
The dispute rumbled on for a further two more years as the two sides debated the value
of the WTC buildings at the time of its destruction.
In 2007, Swiss Re and six other insurers reached a settlement that finally concluded
the dispute. Insurers were to pay $4.5 billion towards the cost of rebuilding the World Trade
Center site.
one of the issues highlighted by the dispute was the differing contract wording used by
insurers, as well as practices that meant that insurance policy documents were often issued
sometime after contract inception.
In the case of insurance for the WTC, which Mr Silverstein had leased just weeks before
the attack, terms were still being finalised with some insurers at the time the loss.
The disputes surrounding the WTC loss led to an insurance industry initiative,
encouraged by regulators such as the UK’s Financial Services Authority, to improve contract
certainty.
Insurers pledged to ensure that all wordings and terms were agreed before policy
inception and that policy documentation must be issued within 30 days.
30 31
MERGERS & ACQUISITIONS: Larger Insurers, But Often Still Fragmented Market
IN 2006 SWISS RE ACqUIREd GE INSURANCE SoLUTIoNS FoR
$7.4 billion, the largest reinsurance deal of all time. The transaction
propelled Swiss Re to the number one position, making it the world’s
largest and most diversified reinsurer at the time.
The acquisition of Kansas City-based GEIS added new clients
and products to Swiss Re’s offering, reinforcing its leading position in
the US reinsurance market. The acquisition was one of the last of the
mega-acquisitions that had marked three decades of consolidation
among the country’s reinsurers and commercial insurers.
Today the US market remains relatively fragmented, but it has had
several periods of consolidation, most recently in the 1990s.
The late 1980s saw the start of a period of heightened mergers
and acquisitions, a trend that would also see many US mutual
companies revert to stock companies or succumb to acquisitions. The
flurry of activity saw one of the largest US insurers, Travelers Group
Inc., merge with US bank Citicorp in a deal worth some $72 billion in
1998. In 2001, American International Group, Inc. purchased American
General Corp for $23 billion.
Foreign insurers were also part of the consolidation, with
companies like Germany’s Allianz buying Fireman’s Fund and North
American Life and Casualty, and Switzerland’s Zurich Financial
Services acquiring Farmers Management Services, Universal
Underwriters Insurance Group and Kemper Corp.
The US reinsurance market underwent consolidation as the sector
became more global. US reinsurers acquired European companies
while European companies made purchases in the United States.
Between 1995 and 1998, some 50 reinsurance deals were
completed in the United States, including the acquisition of American
Re by Germany’s Munich Re. Swiss Re played its part too in the
consolidation, completing 18 deals between 1990 and 2007 valued at
a total of $16.5 billion.
Acquisitions have long played an important role in Swiss Re’s
journey to the top. In the 1990s Swiss Re struck a number of deals,
mostly acquiring life reinsurance companies in the United States.
Between 1995 and 2001 it purchased four major US life reinsurers,
increasing its market share to over 25%.
In 1996 Swiss Re acquired Mercantile & General for CHF 3.2
billion, a London-based reinsurer with 80% of its business in life and
health reinsurance, mostly in America, the United Kingdom and Asia.
Two years later it acquired Life Re, making Swiss Re the largest life
reinsurer in the United States –, followed by the Fort Wayne, Indiana-
based reinsurance arm of Lincoln National Corp, further extending its
market share to 30%.
Swiss Re also made a number of acquisitions to build its property/
casualty and financial services businesses. In 1999 it acquired
Fox-Pitt Kelton, which gave Swiss Re experience and capabilities of
investment banking at a time when capital markets were converging
with reinsurance. In the same year Swiss Re completed the purchase
of Underwriters Re, a subsidiary of Alleghany Corp., which also had a
strong position in alternative risk transfer products and the brokered
reinsurance market.
These, acquisitions, including the purchase of asset manager
Conning Corp in 2001 and the deal to buy GEIS in 2006, made Swiss
Re a much more American company, both in terms of its geographical
spread and the influence of the US business and personal throughout
the group.
3 billion.
The double whammy of 9/11 followed by
the burst of the dotcom bubble made some
insurers, and european reinsurers in particular,
embark on an accelerated program to bolster
their risk management, governance and asset
management. Systems to manage accumulations
of risk and manage asset liabilities were
enhanced, and the first economic models were
developed.
The massive losses of September 11, 2001,
and the bursting of the dotcom bubble came
at the end of a so-called soft market. A period
of low rates and increasing liability claims had
started to eat into the profits of US insurers, and
rates for commercial lines had started to increase.
The losses of September 11 accelerated this
trend, and almost overnight the cost of insurance
increased significantly.
The hardening market for insurance helped
restore profitability for US insurers, but within four
years the market was to face its second major
catastrophe.
Hurricane Katrina first made landfall as a
Category 1 hurricane in Florida on 25 August
before again making landfall on 29 August in
Louisiana, 110 km south east of new Orleans,
as a strong category 4 hurricane. Katrina caused
massive damage to new Orleans, the 24th
biggest city in the US at the time, before moving
inland to cause vast devastation in mississippi,
Alabama and Tennessee.
Winds of up to 240 km/h followed by heavy
rainfall left behind a trail of destruction. The storm
and tidal surge overwhelmed new Orleans flood
defences. Some 1,800 people were to lose their
lives and the industry absorbed massive losses
from damage to commercial and private property
as well as infrastructure and offshore oil rigs in the
Gulf of mexico.
At the time Hurricane Katrina was the most
expensive catastrophe ever recorded, with total
damages of USd135 billion. It has since been
surpassed by the 2011 Japanese earthquake
which caused USd 210 billion in damages,
although Katrina remains the most expensive
insured loss at USd 74.7 billion.
Swiss Re’ losses from Hurricane Katrina
alone were USd 1.2 billion, again demonstrating
the reinsurer’s ability to absorb the impact of
exceptionally large catastrophes, a core function
of a leading reinsurer.
In what was to prove an exceptional year for
US insurers, Hurricanes Wilma and Rita caused
that was to burst in 2001.
The subsequent turmoil, prolonged
by September 11 and the ensuing
political uncertainty of wars in
Afghanistan and Iraq, hit the investments
of insurers and reinsurers, causing many
to write-down the value of assets and
reduce their exposure to equities.
The bursting of the dotcom bubble
also made insurers and reinsurers
re-evaluate their asset portfolio mix in
favour of less risky investments such as
government bonds. In the run-up to the
stock market boom, some insurers had
become overweight in equities—as high
as 30% of portfolios in some cases—but
after the bubble burst, many insurers
reduced their equity investments to
below 5%, while some ceased investing
in stocks completely.
Just as insurers were digesting the
billions of dollars in claims associated
with September 11, 2001, investment
returns turned to investment losses.
Double whammyFor Swiss Re the tragedy of the World
Trade Center led to its largest loss in its
138 year history and contributed to its
first net loss (CHF 165 million) since
1868. Like other reinsurers it suffered
from the accumulated losses from
different lines of business, including
property, aviation, liability, accident
and life—all leading to combined losses
related to 9/11 in the magnitude of CHF
competitive insurance market were now
also causing problems for other liability
lines. While still paying millions of dollars
for asbestos claims, many insurers
were now also finding that class action
lawsuits and securities actions were
generating an unexpected volume of
claims for professional lines like directors
and officers insurance.
Bursting of the dotcom bubbleFinancial markets were the other big
issue for insurers to contend with in the
volatile first decade of the twenty-first
century. The promise of huge efficiencies
and new business models from the
Internet caused a stock market bubble
THE CAPTIVE CoNCEPT HAS BEEN
ARoUNd FoR A LoNG TIME, and is not
too distant from the collective efforts of
Europe’s marine underwriters of the 1500s
and the mutual insurance companies
formed by particular industries to provide
insurance coverage in the 1700s.
A captive insurer is a company formed
to insurer the assets and liabilities of
an entity, however captives can also be
used to insurer the risks of associations
of organisations or groups of companies
that share similar risks. Specific captive
legislation can differentiate captive insurers
from commercial carriers, often simplifying
rules and regulations.
The term ‘captive’ was first coined in
the 1950s by Frederic M. Reiss, a property
engineer turned insurance broker in ohio.
Mr Reiss, who is generally regarded as
the father of captive insurance, began
assisting corporations in setting up captives
in 1958, mainly in offshore jurisdictions
like Bermuda, although Cayman Islands,
Barbados and Guernsey are now also
popular captive domiciles, with many
countries in Europe, Asia and the Middle
East joining the list in recent years.
US regulations made it prohibitively
expensive to form a captive in the United
States up until the 1970s, when US onshore
captives started to become a viable option.
Bermuda has traditionally been the
domicile of choice for US companies,
although changes in tax and insurance laws
in the 1970s and 1980s have kick-started
the on-shore captive industry.
In the 1970s, the first laws were
passed to encourage captive formation in
Colorado, and then Tennessee and Vermont.
According to the National Association of
Insurance Commissioners, the number of
captives has nearly doubled in recent years
as an increasing number of states have
passed, or modified, captive legislation.
With close to 500 captives, Vermont, is
the largest onshore captive domicile in the
United States, followed by Utah and Hawaii.
Initially captives were slow to take off,
but the liability crunch of the 1980s and the
hard market following the terrorist attacks
in the US in 2001 were major catalysts in
their development. Captives are typically
used to retain risks, covering high frequency
and low severity exposures such as property
and motor. However the can be used to
retain risks for which insurers have limited
appetite, or when pricing levels spike after a
major event.
Today captives are held by the vast
majority of Fortune 500 companies,
particularly in the finance, real estate,
construction and manufacturing sectors,
and more recently there has been growth in
the use of captives by health care, property
companies and life insurers.
There are now more than 5,000
captives globally compared with
approximately 1,000 in 1980. More
than 1,000 captives are domiciled in the
United States, with a further 3,000 in the
Caribbean and 1,200 in Europe and Asia.
(Source NAIC January 2012 http://
www.naic.org/cipr_newsletter_archive/
vol2_captive.htm)
The move towards higher retention
levels in the liability crisis had important
long-term implications for US and foreign
insurers.
Although lacking in the diversification
benefits the insurance industry as a whole
can bring, captives and other retention
vehicles have proved an attractive and
effective way to manage high frequency
and low severity risks, particularly in
combination with loss prevention and risk
management measures. They are also
used by high risk industries like energy and
pharmaceuticals to fund infrequent but
potentially high-cost events like a major
pollution event or a product recall.
Reinsurers were particularly active
in helping companies self-insure by
transferring unwanted risks as well as
providing protection against the potentially
most damaging catastrophe losses.
DEVELOPMENT: Captives
32
AND FINALLY: Still The Place To BeTHE US INSURANCE MARKET REMAINS THE LARGEST ANd MoST
influential in the world, reflecting the dominance of the country’s
economy, its prosperity and affluence, its innovativeness, but also aits
exposure to large risks and contagion.
The market is also one of the most sophisticated, being the home
to, and the source of the majority of insurance and risk management
innovations of the past 150 years. Whatever events affect the US, they
carry a larger weight and reverberate around the world, potentially
altering cost, processes and products.
In itself, the United States remains a challenging market,
characterised by its exposure to natural hazards, a still fragmented
state based-regulatory regime, and a legal system that favours
consumers to the huge cost to business and their insurers.
Throughout the history of the US market, foreign insurers and
reinsurers have played a crucial role in supporting US business and
society. The country’s exposure to natural hazards – including some
of the world’s largest potential hurricane and earthquake losses –
requires the capacity and expertise of global reinsurers like Swiss Re.
From the San Francisco earthquake of 1906 to Hurricane Katrina
in 2005, reinsurers have been central to helping the US absorb the
shock of such disasters, helping the country bounce back and continue
to thrive. However, the catastrophe threat remains a major challenge
for the US insurance market, as an increasing number of people are
drawn to hurricane and earthquake-prone states. In addition to the
value accumulation in these regions, climate change further aggravates
the risk by potentially increasing the frequency and severity of natural
catastrophes.
The US tort system, while having undergone some reform in
recent years, also poses an on-going challenge to the insurance
industry, as does the potential for government and the courts to
reinterpret established industry rules and practices. Following 9/11
the US government moved to limit the liability of airline carriers, while
following Hurricane Katrina insurers were encouraged to settle claims
for flood damage.
While proving to be a testing market for reinsurers, the US
insurance sector has been instrumental for the growth of Swiss Re,
and likewise Swiss Re become an intrinsic part of the US market,
having taking part in all the major events of the past 150 years.
For almost all of its history Swiss Re has been close to the heart
of the US insurance and reinsurance market, supporting property/
casualty and life insurers through both good times and bad. over this
time Swiss Re has itself become a more international company, and
grown into the leading provider of reinsurance capacity and expertise
for the US market.
a further USd 35.6 billion of insured damage,
and followed on from the USd 25 billion bill for
Hurricanes Ivan, Jeanie, Francis and Charley in
2004.
Hurricane landfall activity after 2008 abated,
but a new storm was about to break in the form of
the US and european banking system.
Financial crisisThe banking crisis of 2007 and 2008 started in
the US sub-prime mortgage market but quickly
spread to major banks in the United States and
europe. Culminating in the collapse of investment
bank Lehman Brothers in September 2008, the
crisis spilled over into the broader economy as
the worst recession in decades.
One of the major features of the crisis was
to be the damage caused by trading in Credit
default Swaps, credit insurance that took the
form of derivatives contracts. The CdS market
had grown astronomically in the years leading up
to the crisis, with many banks and some insurers
holding significant exposures.
American International Group (AIG) was a
big player in the CdS market and counterparty
to Lehman. The bankruptcy of the investment
bank threatened to drag AIG down with it, but a
last minute bailout saved the then world’s largest
nonlife insurance company.
most US insurers managed to successfully
navigate the financial crisis, although six life
insurers –Hartford Financial, Lincoln Life, Principal
Financial, Allstate and Prudential Financial sought
assistance from the US governments Troubled
Asset Relief Program.
While insurers did suffer from the extreme
financial market volatility following the collapse of
Lehman, insurers more conservative investment
strategy and lessons learnt from past stock
market turmoil meant that most US carriers came
through the crisis unscathed.
US insurers also escaped the same liquidity
issues that paralysed the banks—insurance
premiums are typically paid upfront and are not
subject to the demands of policyholders, other
than to pay claims.
Overall losses were only one-sixth of those
suffered by the banking sector. And while a
handful of insurers received state aid, some 592
banks were to require federal funds.
Swiss Re refocuses
Swiss Re was also caught in the financial
storm. Beyond the fall in share price and assets
classes experienced by most other insurance
players, Swiss Re had to report losses related to
two credit default swaps. The company reported
a CHF 11.4 billion reduction in in shareholder
equity on investment losses and a loss of CHF
864 million for 2008.
despite challenges, Swiss Re emerged from
the crisis as a leading reinsurer, a tribute to the
strength of Swiss Re’s core reinsurance business
and its solid client base. The company benefited
from a USd 3 billion investment provided by US
investor Warren Buffet’s Berkshire Hathaway. The
investment was seen as a sign of confidence in
Swiss Re and its actions taken during the crisis.
The company moved to de-risk its investment
portfolio and refocused its business on its core
property/casualty reinsurance, life reinsurance
and corporate solutions. The Financial Services
Business was disbanded and split into asset
management and legacy business.
Swiss Re was back reporting profits in 2009,
and in november 2010 the company repaid
the loan from Berkshire Hathaway in full. It was
finally able to put the financial crisis behind when
Standard & Poor’s acknowledged the progress
made by the company and upgraded the financial
strength ratings to AA+.