1 October 2012Re/insurance

Outfoxing the European competition

While US business has traditionally been the lead component in any Bermuda player’s book, European exposures represent an important second pillar. And as Bermuda players have looked to develop and diversify their book of business—away from what was, for many, an initial US property cat focus—European lines have become an increasingly prominent part of their portfolio. A Lloyd’s platform has helped many develop their presence, even if its reach into mainland Europe has its limits. Offices in Switzerland— Zurich in particular—appear to have been rather more helpful, and a number of Bermuda players have pursued that particular route. The question however remains: how can Bermuda players—with roots and associations across the Atlantic—compete with the big European reinsurers?

One of the things that Bermuda can do is play to its strengths. These are evidently in the property cat space where Island players have really cut their teeth in recent years. As Tatsuhiko Hoshina, CEO of Tokio Millennium Re outlined: “Bermuda has always been strong on the property cat side, but we are gradually becoming increasingly multi-line.” Jacopo D’Antonio, managing director for Europe at Aspen Re spoke in a similar vein, indicating that “Bermuda reinsurers are generally acknowledged to be first class property cat underwriters and they are already able to compete and win in this line of business”.

"The combination of two word-class underwriting centres in Hamilton and London remains a lasting strength for players with a presence on both sides of the Atlantic."

The strength of Bermuda players’ technical expertise and underwriting capabilities in the cat space place them in good stead to compete in Europe. Windstorm Xynthia in 2010 provided some indication of the support that Bermuda players afford the European market, with 37 percent of reported liabilities being covered by Bermuda players, according to statistics from the Association of Bermuda Insurers and Reinsurers (ABIR). It is likely that Bermuda will continue to play a prominent role in Europe’s property cat space, but what about those players that wish to diversify their books of business into other lines?

To compete with the giants of European reinsurance, it will be necessary for Bermuda players to be both selective and nimble, said Hoshina. As he explained, unlike some of the large European reinsurers, Tokio Millennium Re does not take a quota share of the market; rather its approach is to “seek out the best clients and accounts”. Hoshina explained that Tokio Millennium Re is able to approach the market in this way because the reinsurer’s focus is not upon building market share—something that, he said, is a preoccupation of the larger European firms—rather its emphasis is on pursuing quality business. When competing against the big European players, Hoshina said that it is “necessary to play to the strengths of your company and to be strong in a particular area”. Being all things to all people in a competitive European market dominated by large entities is simply not possible.

Another area that D’Antonio highlighted as being of potential interest to Bermuda players is specialty lines. As he indicated “specialty lines appear to offer good opportunities to Bermudian reinsurers”. Specialty lines extend obvious diversifying benefits to firms with a weighting towards cat business, while leveraging some of the underwriting and technical expertise Bermuda players can bring to bear to understand and price these often complex risks. Bermuda players with Lloyd’s platforms—and there is a fair few of them—can also draw upon London expertise in lines such as marine and political risk to present a compelling offering to European cedants. The combination of two world-class underwriting centres in Hamilton and London remains a lasting strength for players with a presence on both sides of the Atlantic.

Nevertheless, building relationships with European clients is no mean feat in the face of stiff Continental competition, and is never going to be truly possible from afar. As D’Antonio indicated: “European clients are conservative in their approach to selecting reinsurance partners. They prefer to do business with people who are familiar to them, working in a familiar company, based in familiar jurisdictions. In Europe, reinsurance buyers need to trust that their partners are going to be there to pay legitimate claims 10 years down the line. The continuity of the relationship and a steady pricing strategy across the reinsurance cycle are highly valued. Successful Bermuda players have understood the importance of these values alongside efficiency and technical knowledge.”

Inextricably linked to this notion of reliability and continuity is a presence in Europe. As D’Antonio made clear, while Lloyd’s syndicates have created some opportunities in Europe, “a presence in London is not sufficient to penetrate the European continental market. A local presence in continental Europe is necessary”. With numerous Bermuda players setting up offices in Zurich and Zug in recent years, it would seem that this message is being conveyed loud and clear.

XL is one such company that sees the merits of boots on the ground in Europe. Jamie Veghte, chief executive of reinsurance at XL, said that not all firms will pursue such a strategy, but for XL it made sense. The company made its investment back in 1999, when it entered a joint venture in Europe, in which the firm ultimately tooka majority holding—the company becoming XL Re Europe. Veghte explained that the move fitted XL’s long-term strategy to be a global multi-line reinsurer.

“If you want to write only property cat—particularly for lines with large capacity needs—you can do that from Bermuda,” he said, but if your ambitions extend further, then a physical presence in the markets you write is a necessity. “We are unlike some of our brethren in Bermuda in that property cat is only 25 percent of our global activities. Considering the make-up of our book of business it would be very difficult to access business in certain parts of the market without a physical presence,” said Veghte. D’Antonio concurred, saying “proximity to the clients and to the brokers’ network are key to success in an increasingly competitive environment”.

Fortunately, working the broker channels and winning broker- placed European business is something that Bermuda players do rather well. According to statistics from ABIR, Bermuda reinsurers write 27 percent of broker-placed European business. Brokers are therefore an important conduit for business, but as D’Antonio indicated, “brokers are important in presenting Bermudian reinsurers in the right light, but reinsurers have to realise that only a part of the business is transacted through brokers in Continental Europe. Therefore Bermudian reinsurers that want to succeed in Continental Europe must have a marketing strategy that includes a direct relationship with clients. This is absolutely essential, in particular for those that are interested in long-tail business”. And while long-tail business may not be particularly attractive in the present investment environment,greater direct contact with clients—be it on long or short-tail lines— will necessarily have to form part of Bermuda players’ European strategy.

There are, however, no easy routes to winning European hearts and minds. “Bermudian reinsurers must be prepared to invest sufficient time and resources in business acquisition so that prospective clients can fully understand—and gain confidence in—their value proposition,” said D’Antonio. “This includes a full explanation of capital structures, investment approach, underwriting policy and enterprise risk management. There is no room for complacency, as local insurers have—in some cases—hundreds of years’ history to draw upon.”

Key to outfoxing the European competition will be quick feet, said Hoshina. “Large European players find it difficult, because of their size, to be nimble. Bermuda has always been nimble, able to sniff out changes in the market and developments in the cycle quicker than the European market. It is in slight changes to the market that Bermuda can really excel. Bermuda has been adept at responding to change and I expect this to continue.”

Solvency II, the continuing rise of alternative capital structures, a troubled investment environment and a possible or partial collapse of the eurozone may prompt changes in the market to which Bermuda players can ably respond. In the meantime, Bermuda players will continue to develop their presence in Europe as the Island’s past focus on property cat becomes increasingly global and diverse.