European insurance. Try anything once

Broad expertise is the order of the day

INSURERS, bless them, don't have a reputation for being daring. That's the point, you might say: their job is to soften the impact of life's dramas. In fact, they are keener on novelty than you might suppose. Take architecture, of all things: Swiss Re's London office, known to locals as the Gherkin is just across the road from Lloyd's of London's inside-out colossus, still an eye-catcher 20 years after it went up. Increasingly, insurers are willing to change things in management, too. Several big European firms got new chief executives this week, and none of them are pure actuaries and underwriters, as the industry's bosses once were. Rather, they reflect the blurring lines between insurance and other financial disciplines.

Start with Swiss Re. When Jacques Aigrain took over from John Coomber as chief executive, the reinsurer's leadership passed from a man who started with the firm as an actuary 33 years ago --"an absolute classic of the old era," says a market observer--to a man who joined just five years ago, having spent two decades as an investment banker at J.P. Morgan with expertise in mergers and acquisitions. Nick Prettejohn, newly installed as head of Prudential's British unit, was in consulting and private equity before heading Lloyd's of London. Tim Breedon, the new boss at Legal & General, most recently ran his firm's pounds 187 billion ($329 billion) investment arm.

"In the past, knowledge and experience in the insurance sector was always top of the list" for senior executives, says Simon Hearn of Russell Reynolds, a head-hunting firm. "That now comes halfway up the list." Analysts say the trend is more evident in Britain and Germany than in France, Spain or Italy. Turnover at the top has also accelerated in recent years.

Several factors account for the shift. Insurers, which make money from premiums and investing to offset claims payments, had a long run of poor underwriting years, which encouraged them to manage investments better. Although underwriting has since improved, they are still under pressure from shareholders to raise their financial returns. This is especially true of life companies, which need to match their assets to long-term liabilities.

Having developed the expertise to manage their own portfolios, some insurers (such as France's AXA and Britain's Aviva) have established asset-management arms to handle investments for clients. Others, including ING, of the Netherlands, and Allianz, of Germany, have gone further and offer banking too.

Insurers are also tied to financial markets in other ways. There is now a secondary market in tradeable products that can off-load risk to investors. Securitisation is growing. AXA, for instance, recently issued euro200m ($242m) of asset-backed securities on its motor-insurance portfolio. Swiss Re last week securitised policies worth $370m, its second such transaction.

Underwriting, of course, remains a cornerstone. Analysts predict that premiums in Europe will rise in sectors affected by the big and costly hurricanes that battered America in 2005 (about half of the losses are likely to be borne by European companies). An added factor is the rising cost of reinsurance, which will be passed along to many primary insurers.

The chief executives taking office this week all lead profitable businesses. Others in the industry, though, face difficulties. Rating agencies have taken a harder line with insurers, especially since the big losses after the terrorist attacks in America in September 2001, issuing many more downgrades than in the past.

The slow growth of European markets, especially Britain, is another challenge. Big insurers are increasingly looking to developing markets for both customers and cost savings. Many have joint-ventures in India and China--although barriers to entry remain and few expect to make money soon. Martin Markus, a partner at McKinsey, says that further cost savings could be achieved with cross-border co-ordination. Several firms are already servicing claims abroad. Aviva, for instance, now employs 6,500 people in India. It reckons it makes net cost savings of about 40% on activities there including telephone sales, claims management, data processing and invoicing. Mr Markus sees undertapped potential in cross-border underwriting too, including motor insurance.

A final factor is new regulations on capital levels, which favour insurers that are bigger and more diverse, since they generally experience less volatility and therefore a lower cost of capital. (European insurers, which tend to have both life and non-life businesses, are generally more diversified than American firms.)

The emphasis on size and diversity is likely to fuel further industry consolidation. Analysts say, however, that this is unlikely to be at the pace or on the scale of the last big wave, several years ago. They see greater potential for acquisition of medium-sized insurers within countries than big cross-border deals. This did not stop Mr Aigrain from helping to secure a recent deal to acquire part of General Electric's reinsurance business. It looks as if his M&A experience has already been useful.

Challenges facing the insurance industry in Europe.