Revisiting the U.S. Market
Any would-be global insurer needs to penetrate the world's largest risk marketplace--the United States--to be a worldwide success. Yet over the past decade, more than one major European insurer has stumbled in the U.S. marketplace.
Standard & Poor's, in a recent analysis of the U.S marketplace, noted that earlier in the decade there were "historical challenges for the European writers ... most notably questionable underwriting discipline; above-average exposure to equity investments; the Sept. 11, 2001, terrorist attacks; and adverse asbestos and mold claims development."
For the past two years, European and U.S.-based insurers have posted underwriting profits because there have been no major natural catastrophes that severely affected insurers' bottom lines. But with the markets continuing to soften even more aggressively, insurers are under increasing profit and revenue pressures. And now major European insurers are looking at the United States with renewed interest, even many European insurers that have suffered significant losses in the U.S. market in the past.
A slew of new insurance executives are in place to head up U.S. operations, and a number of the insurers have recovered from past mistakes, made significant U.S. acquisitions and are now looking at the U.S. market to grow.
Among the new breed of North American executives is Michael T. Foley, CEO of Zurich North America, who was appointed to his new job in December after two years as chief operating officer. Zurich writes in all U.S. markets, and Foley's operation targets the middle and upper end of the middle market.
In March, Zurich announced that it had moved small business commercial accounts to its Farmers Group. The large accounts in North America fall under the leadership of Mario P. Vitale, CEO of Zurich Corporate Global North America, who came on the job two years ago after leading Willis' North American operations.
"In the U.S. market, you do see the emerging risks," says Foley. "Operating effectively in North America requires sophisticated risk selection capabilities. You can't have a good mix of risk without a strong U.S. portfolio. The U.S. market has an important role, and it's a different market from other areas of the world," he says.
Many European-based insurers remain somewhat wary of the U.S. market and insist that, especially in the current phase of the cycle, underwriting profits will be key to future success. The U.S. market sits at the center of most large insurers' strategies to diversify risk worldwide throughout their entire portfolio.
It's an issue that becomes more important as insurance prices fall, margins shrink and investment income declines, or losses appear from subprime investments.
"We've been here since 1912," says Zurich's Vitale. "We've been through all of the issues here. We've learned how to weather difficult events in this market. Having deep customer relationships has helped us during all these events." Vitale says.
Zurich may well be the best positioned to continue to benefit from its U.S. business--it has extensive distribution to all segments of the marketplace both large and small.
For decades Zurich has also been the biggest European insurer in the North American market, especially among the largest global corporate accounts, where it holds the second-largest market share of any insurer that offers cover in North America.
"Every part of the world offers different challenges," says Vitale.
Besides the large variety and the sheer size of risk in the United States, other factors like "the legal system here and the complex regulatory environment" make North America different from markets in other parts of the world, Vitale says.
"I think the opportunity for growth in North America is good," he adds, noting that, "for the most part in the past, insurers outside of the United States didn't realize the uniqueness or the size or how to really do business well in this market."
North America continues to be a critical market for Zurich, Vitale says, as "our customers continue to become more and more global. We believe strongly in new products, and we see opportunity for growth from new areas for risk transfer."
"For Zurich, you really can't have a good mix of risk without a strong U.S. portfolio. In a global company like ours, the United States has an important role, and it's clearly a different market from other areas of the world," Foley says. "We've committed significant capital to the market, we've diversified our risk here, and we've made strides in what we call our 'operational transformation' so that we can deliver the best possible experience to our customers."
At Allianz Global Corporate & Specialty, part of Munich-based giant Allianz Group, president and CEO Wolfgang Schatz is a German executive who brought a distinctively European perspective to the North American market when he took over the top U.S. job two years ago.
Allianz Global Corporate focuses on the very largest accounts here while another Allianz subsidiary, Fireman's Fund, is more broad-based in terms of its client base.
"With our industry specialization model," Schatz explains, the insurer can focus "on 13 distinct industry sectors to develop a deep understanding of our client's exposure and the challenges they face."
The emphasis in North America is client service, operational excellence and superb underwriting.
Allianz recently expanded its niche strategy by adding "to our casualty appetite for our existing U.S.-based property clients and prospects where we have a very good understanding of the risks," Schatz says.
The competition in the United States, he explains, "encourages us even more to focus on our diversification strategy with such things here as the introduction of aviation coverage in 2006, as well as following good underwriting standards ... to ensure we're in the market for the long term."
At the same time, Allianz remains careful in its selection of U.S. risk.
"The subprime crisis has not affected us in regard to our product offerings," he adds.
"For example, we do not offer directors' and officers' coverage here in the United States, and therefore we do not have to consider consequences from the subprime crisis in this respect," he says.
Primary insurance, of course, isn't the only U.S. market. There is insurance on insurance, or reinsurance.
Munich Re America estimates that there is about a $50 billion reinsurance market here, and historically Munich Re has been the biggest player worldwide.
Last year the reinsurance giant, after completing a review and analysis of its North American operations, named Anthony J. Kuczinski as chief executive officer of Munich Re America. It announced a new strategy for its reinsurance business that focuses on, among other issues, increasing its U.S. profitability.
"We are first and foremost a reinsurer," says Kuczinski. "I see our reinsurance business remaining the biggest part of what we do here in the United States. Our primary insurance business is complementary to our reinsurance."
"The U.S. market is the largest market in the world. It's the most complicated market in the world, but that complication fits well into the Munich Re structure because we are a well-diversified, very technically strong underwriting company with expertise in many lines of business," Kuczinski says.
Yet Munich Re also has a strong presence in niche primary markets.
For example, Munich has always been a big player in the U.S. public-entity markets, and Kuczinski says it has plans to increase its managing general agency business. "The first thing we look at is scale and how big the market is. Then we look at how competitive it is and what can we bring to the table. We want to find areas within those markets, because of our expertise, where we can be more competitive."
Meanwhile, sitting in the background, ready for more aggressive expansion in the United States, sits the reinsurance behemoth Swiss Re, now the world's largest insurance company after its acquisition last year of General Electric Insurance Solutions, formerly Employer's Reinsurance, which was active in both the primary and reinsurance markets.
Swiss Re executives were unavailable for this article, but the company has been expanding both its reinsurance, primary and specialty business in the United States with the GE acquisition. Swiss Re is also a leader in the distribution of insurance-linked securities.
All of the largest global reinsurance players have to be in the U.S. market, especially if they are to serve the largest companies that, while often based outside of the United States, have subsidiaries that operate here.
As more than one insurance executive has pointed out, if a global reinsurance company really wants to diversify its risk portfolio, it must have a significant presence in the U.S. market.
"The United States adds balance to our world portfolio," says Kuczinski. "In the current market, we're a bit more focused on the shorter-tail risks, and we're not going to commit to those longer-tail lines of business the way we might have 10 years ago."
Kuczinski's goal isn't necessarily to increase Munich's market share here.
"The goal of our strategic analysis was to look at the potential for a profitable entity in the United States over the long run," he says. The result: "As the largest reinsurer, we think it's the right place, the right time, and there are places where we can continue to make money in this marketplace."
None of these executives predicts a jump in U.S. sales. For most, right now, the focus is on retention. New business brings new risks and a greater chance of losses because it can be tougher to underwrite and more competitive on price.
"Due to the competitiveness of the marketplace, we expect moderate growth in the property segment of the business, while we anticipate our specialty business to expand and generate organic growth based on additional product offerings," Allianz's Schatz says. "Overall, we see growing demand for global insurance solutions from our clients."
"It's a tougher market out there," Vitale says. "I think the opportunity for growth is good. No company dominates, but our client companies are becoming more global. This is a worldwide business. Our customers demand that. If a U.S. company has worldwide exposures, they want global coverage, and that's what we have to provide."
Adds Munich Re America's Kuczinski: "We are risk-takers, but especially in this market, you have to understand the risks that you are taking. You have to apply the kind of discipline needed to assure yourself that, in a particular line or coverage, you can make money. That's where we plan to grow."
After his relatively short tenure in the States, Schatz offers his European perspective: "I appreciate people's openness to change and willingness to trying something new. Instead of concentrating on obstacles, my North American colleagues focus on the opportunities that arise with each new approach."
JACK ROBERTS is editor in chief of Risk & Insurance®.
April 15, 2008
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