Europe: there be giants
In pursuit of increasingly global strategies, Bermuda players have—over the past decade—sought out Zurich as a hub for burgeoning European operations. European continental business makes an ideal complement to what has traditionally been a focus on the US catastrophe and liability markets, with Bermuda players able to deploy their underwriting, modelling and technical expertise to a diversifying European portfolio. Catastrophe perils make the most immediate sense, but Bermuda entrants are writing a diverse book of risks in Europe.
As Peter Stubbings, CEO, Continental Europe and MENA at Guy Carpenter, explained: “What we’ve seen over the last few years is Bermuda companies developing a multi-platform model that recognises the need to grow outside Bermuda and into Europe—either through London or a separate hub in Zurich.” Switzerland has proved a popular choice and many Island reinsurers are now well bedded-in, with others likely to follow.
“Some players have even recapitalised and moved their capital to Zurich from Bermuda,” said Stubbings, “reflecting a desire for greater access to European business and a willingness to compete with the bigger continental reinsurers.” Tokio Millennium Re is one such player that has opted to make Zurich its home, announcing its intention to redomesticate its headquarters from Bermuda to Switzerland with formal approval expected from the Swiss Financial Market Supervisory Authority (FINMA) in October this year. Such is the allure of Zurich.
Stubbings said that greater geographic penetration has helped Bermuda players explore casualty and long-tail lines. “If you really want to open doors to a lot of the bigger European buyers, then you have to look at how you can transact in other lines of business. There’s been a big shift, not just in lines of business, but also where reinsurers domicile themselves.”
Some people have expressed concerns that this transfer has reduced the significance of Bermuda, but Stubbings was rather more circumspect. “The shift is not undermining Bermuda—it’s actually strengthening the position of Island players, because they’re accessing business out of multiple locations now.” Gone are the early days of mono-line players focused on catastrophe business. Bermuda players are growing increasingly global and European operations are proving an attractive complement to existing business.
A European affair
AXIS was one of the early entrants to the Swiss market, planting a flag back in 2003, with its Zurich office nowadays acting as an underwriting centre for more than simply Europe. As Stephan Knipper, president and CEO of AXIS Re Europe explained, with nearly 100 people based in Zurich, writing business across Europe, the Middle East and Latin America, the city has become a major component of AXIS’s strategic ambitions. “AXIS Re Zurich is our largest reinsurance unit and is clearly core to our global activities,” said Knipper, predicting that the unit will write $850 million of premium in 2013.
“Zurich is not just an underwriting hub for AXIS, it is also an important operational hub. We have catastrophe modelling, IT and technical expertise here, and with a mandate that extends beyond Europe, Zurich has emerged as a key strategic asset within the reinsurance arm of the group,” said Knipper. This appears to be an approach that a number of Bermuda players are taking—building a presence in Zurich that is similar in scope and capabilities to their hubs in Hamilton or London.
A Zurich office enables players to write a more diverse book of business, said Stubbings, and Island players will need to do that if they want to establish themselves in Europe. As he explained, it will be in providing a full product offering that Bermuda players will be able to establish a credible place for themselves in Europe.
AXIS has done exactly that, deploying European underwriting capabilities across the full spectrum of classes, rather than simply those that act as a diversifier to their Bermuda catastrophe business. As Knipper explained, “We strongly believed in offering a broad product range here in Europe. Although we started out as a classic Bermudian company, with the establishment of AXIS Re Europe we have developed into a Euro-Bermudian player that places an emphasis on continuity and consistency in our customer approach.”
Tokio Millennium Re—which entered the European market in 2010—is following a similar approach, writing a diverse book of business right across Europe, with European expansion forming an integral part of its strategy of diversification—both within the reinsurer and at the parent, Tokio Marine. As Stephan Ruoff, CEO of Tokio Millennium Re Zurich explained, “Having been for many years a pure catastrophe company, we established our Zurich office in 2010 as an opportunity for growth, to generate risk diversification and better deploy our capital.” Ruoff said that the company hasfollowed a steady, purposeful approach in Europe, one that reflects the company’s Japanese heritage but that also reflects Tokio Millennium Re’s increasingly global profile.
A matter of selection
It is apparent that a local and meaningful presence in Europe forms a significant component of any continental strategy. As Knipper outlined, having a carrier in continental Europe backed by credible capital is integral to securing continental business. Being able to offer capacity locally is very important in Europe, he explained. “When we moved into Europe it was not about putting minimum solvency amounts into our Dublin carrier, it was about putting an amount into the entity that was meaningful in the European market and that is perceived to be accessible by European clients.” In other words, a European footprint needs to be appropriately deep.
Ruoff added that proximity helps players understand the market, with local underwriters integral to such an approach. “Ceding companies in Europe are more conservative and tend to stick with their reinsurers, even if an underwriter changes. As a newcomer you have to present your value proposition to the client—which in our case is our rating and our conservative, quality-driven approach—and the ability to cope with their book of business, to prove that you can add value for them and establish the relationship. It is easier with a known underwriter because it opens doors, but it does not automatically mean you get the business,” he said.
That is not to say that existing relationships cannot be significant. As Knipper explained, in AXIS’s case, “in its early days some people didn’t look at our balance sheet, they looked at the people involved and said ‘I’d like to do business with you’”. In Europe’s relationshipdriven markets “putting the right people in place with the experience and connections can help a lot”, he added.
What is necessary is a local presence that can help win over conservative European clients. This is particularly true of smaller continental insurers who are less willing to travel for their reinsurance capacity. Rather than precluding such business, Bermuda players “have been smart” and set up European operations that enable them to be close to the client, said Stubbings. Such clients are attractive prospects, with some of the larger European insurers having already built lasting relationships with continental reinsurers. Ruoff said that for Tokio Millennium Re small and medium-sized continental insurers represent the ideal clients, while for European insurers the reinsurer represents an attractive diversifying option for their reinsurance panel.
Stubbings agreed that it is tough contending with the European competition, particularly with those companies that have established lasting relationships with insurance clients. As he explained, “These are historical relationships which are very difficult to break into. How you do break into those is by offering capacity across multiple lines and by spending time with the client; by having a base in the particular country and demonstrating that capacity is there for the long term. It’s not about being speculative and opportunistic.”
Credibility is an integral part of this process, as Bermuda players must look to build trust in a market that has traditionally been dominated by large, European reinsurers. Operating in Europe is about consistency of approach, said Knipper. “You need to think longterm, and not simply be a yes-man or no-man in Europe.”
A tough neighbourhood
Bermuda players face stiff competition in Europe from the big continental reinsurers. While the Island can hold its own in the catastrophe space, competing on local and non-catastrophe business is more challenging— particularly in the face of conservative and long-term relationships. Ruoff said that Tokio Millennium Re it is looking to differentiate itself in Europe through the strength of its A++ (Superior) AM Best rating and a capital base with only a single shareholder—Tokio Marine.
He agreed that some of the big European reinsurers boast a similar profile, but added that due to Tokio Millennium Re’s relatively small size, the company is looking to leverage its ability to provide speedier quotations and be more nimble in its underwriting operations to outfox the more established competition. Knipper said that AXIS is able to be successful in Europe thanks to its “strong, local technical ability and proactive execution”. He explained that an ability to be fast on its feet and flexible in its approach— helped by its relatively small size—has helped to set it apart from the competition. “We don’t fear our competition, we can do very much what the larger players do, but with a smaller, more dynamic team.” Other Bermuda players have spoken in similar terms.
Ruoff admitted that the more mature European markets are “highly saturated”, necessarily requiring entrants to compete for market share, but added that in such instances Bermuda players have opportunities if they work hard to distinguish their value proposition. He added that there are also significant opportunities in emerging jurisdictions and in rising European demand for aggregate programmes—particularly for catastrophe coverage. Solvency II has also helped to increase opportunities for reinsurers, with the impending regulatory regime “helping to influence the reinsurancebuying behaviour of ceding companies.
The transparency created by Solvency II has led many cedants to consider buying reinsurance structures more closely”, said Ruoff. Relative newcomers can hope to benefit from this increased transparency defining the need for reinsurance. Nevertheless, the presence of strong continental players in key markets such as France and Germany has undoubtedly slowed the progress of Island players in those countries. As Knipper explained, in AXIS’s case the company has developed its presence more slowly in Germany in the face of strong local competition, with greater success achieved in less well-served markets.He did, however, caution that it takes time to establish oneself in Europe. “It’s important for the smaller European players to set their targets clearly and pursue them over the long term. You cannot believe you can be successful from day one,” said Knipper.
AXIS’s timing may well have helped in this, with the reinsurer an early and fortuitouslytimed entrant to the European market. Brokers also have an important role to play in helping Bermuda players crack the European markets. As Knipper outlined, broker distribution in Europe has been of considerable help to AXIS Re as it has expanded its position in Europe. The development of its broker-led business has operated in parallel to the building out of direct links with clients, helping to increase market penetration.
Ruoff agreed that broker-led markets tend to be the easier route for new entrants in Europe, with ceding companies in the more traditional and direct-led markets such as Germany and Italy “taking longer to open their doors”. But while brokers can play a significant role in helping Bermuda players develop their European operations, Knipper said that it is important not to lose sight of close contact with the European client. “In the current soft market environment you need to stay very close to the client to be heard. You really need to have your own profile with the client, to assure them that you have the knowledge, and the technical and structural ability to take their business—be it brokered or direct.” It is apparent that Bermuda players will need to burnish their credentials and retain their underwriting philosophies in the face of tough, local competition in Europe. European talent Zurich continues to represent an attractive prospect to Bermuda players.
Knipper is confident that more Island reinsurers will set up shop on the shores of Lake Zurich, drawn by local business, the strength of European talent and an attractive and internationallyrecognised regulatory environment. Ruoff concurred, arguing that few locations can compete with Switzerland’s pool of intellectual capital, drawn from France, Germany, Italy, Switzerland and beyond. And in an industry predicated on the talent of its people, it is likely that this factor will help tip the scales when it comes to Zurich, setting the Swiss city apart as the continental European centre of choice.
