Proposal preview

Role of reinsurance in the setting of insurance in the World

Insurers also need protection against risk. That is why reinsurance has developed in last two centuries. At first, it led insurers to reinsure on a mutual basis and Lloyds was the prototype of a market in coinsurance. However, reinsurance is a separate contract between the insurer and the reinsurer. The insurer assumes the entire risk, even in case of failure of the reinsurer. Anyway, to make the development safer, or to minimize risk, reinsurers can reinsure to other companies, which allows an even wider distribution of risks.
Economic development in the last centuries introduced new risks and larger risk. For example ships, their value was of little importance compared to the cargo. Not so with the construction of the steamship. That meant the insurance of large vessels became more difficult. Similarly, fire insurers had greater risk because the world was building bigger factories, shops and warehouses. Industrial risks change and greater risk undertaken. These new risks were a major problem for the insurance companies. The situation of many of them became unwarrantable.
Reinsurance developed network in the world. With a great conflict with each country because their own laws and traditions. That is why, the need for insurers taken different forms. In Anglo-Saxon countries, like England, coinsurance prevailed, with a large centralized Lloyds insurance market. In continental Europe was different with the first marine reinsurance contracts dating from the eighteenth century.
Though, reinsurance grew more in the branch of the fire insurance. The development of the manufacturing system, fire hazards demanded in the last third of the nineteenth century an unprecedented development of the insurance business. Nonetheless, reinsurance developed with poor financial capability so it was slow its improvement. Insurers simply adopted different premiums according to specific risk and limit their commitments to well-defined areas. In addition, unlike mutual, very active in the fire risk, insurance companies could not ask for help to their insured in case of exceptional losses, so had to develop more coinsurance or the reinsurance branch.
As coinsurance showed only limited capacity and could harm business confidentiality, insurance companies then had the idea of creating companies specializing in reinsurance, whose role would be to take big risks. Finally, developing retrocession that is far more ceding. That is to spread worldwide between many correspondents able to absorb a certain amount of risk.
The industrial revolution and the concentration of capital that resulted in the nineteenth century favored the outbreak of the first professional reinsurance. Companies of non-marine risks on the continent, especially in Germany and Switzerland. Today the major companies in reinsurance come from both countries: Munich Re and Swiss Re.

Organizer(s)

  • Leonardo LC Caruana, University of Granada, lrcaruana@gmail.com Spain
  • André AS Straus, Sorbonne University Paris 1, strausandre22@gmail.com France

Session members

  • Robin RP Pearson, University of Hall
  • Takau TY Yoneyama Japan, University Hitotsubashi University
  • Christopher CK Kopper , Universität Bielefeld
  • Jerònia JP Pons, University of Seville
  • Pablo PG Gutiérrez González, University of Seville
  • Gustavo Adolfo GAAM Del Angel Mobarak , división de Economia del CIDE
  • Robert RW Wright, Augustana college-Sioux Falls
  • Ben BG Gales, University of Groningen
  • Mikael ML Lönnborg , Södertörn University in Stockholm

Discussant(s)

  • Mira MW Wilkins, Florida International University, wilkinsm@fiu.edu
  • Hugh HR Rockoff, Rutgers University, rockoff@economics.rutgers.edu

Papers

Panel abstract

Insurers also need protection against risk. That is why reinsurance has developed in last two centuries. At first, it led insurers to reinsure on a mutual basis and Lloyds was the prototype of a market in coinsurance. However, reinsurance is a separate contract between the insurer and the reinsurer. The insurer assumes the entire risk, even in case of failure of the reinsurer. Anyway, to make the development safer, or to minimize risk, reinsurers can reinsure to other companies, which allows an even wider distribution of risks. Like this, the history of insurance industry has developed in a successful way up to today. This session is to analyze this process in several countries with an international perspective.

1st half

Trust, Social Capital and the Rise of 'Commercialism' in the Business of Reinsurance 18701939

Robin Pearson

Reinsurance is often characterised as a business built on personal relationships, goodwill and mutual trust. To what extent has this been true in the past? The aim of this paper is to investigate, for the first time, what was involved in the micro-business of doing reinsurance in the past. How did the process of reinsurance, and the individual business, social and personal exchanges that constituted that process, change since the early days of the industry? By necessity some attention will be paid to the technical aspects of reinsurance underwriting, but only to the extent that they shed light on the social and business history of doing reinsurance.

Reinsurance is often characterised as a business built on personal relationships, goodwill and mutual trust. To what extent has this been true in the past? The aim of this paper is to investigate, for the first time, what was involved in the micro-business of doing reinsurance in the past. How did the process of reinsurance, and the individual business, social and personal exchanges that constituted that process, change since the early days of the industry? By necessity some attention will be paid to the technical aspects of reinsurance underwriting, but only to the extent that they shed light on the social and business history of doing reinsurance.

Reinsurance in America: Regulatory Regimes and Markets

Robert E. Wright

Despite possessing one of the largest and most important economies in the world for two centuries, the United States until recently was noted more for its securities markets than its banks, a fact generally attributed to regulatory rules, like unit banking and the separation of commercial and investment banking, that favored small banks. U.S. regulatory regimes also appear to have created a preference for alternative risk transfer mechanisms (ARTM), including risk markets, over the creation of large, domestic reinsurance companies. This paper explores that hypothesis by examining the history of reinsurance and reinsurers in the U.S. since the nineteenth century using both archival and printed primary sources and concludes that where large, domestic reinsurers are blocked by costly regulations, direct writers will turn to alternative forms of sharing risks, including ARTM and foreign and reciprocal reinsurance.

Despite possessing one of the largest and most important economies in the world for two centuries, the United States until recently was noted more for its securities markets than its banks, a fact generally attributed to regulatory rules, like unit banking and the separation of commercial and investment banking, that favored small banks. U.S. regulatory regimes also appear to have created a preference for alternative risk transfer mechanisms (ARTM), including risk markets, over the creation of large, domestic reinsurance companies. This paper explores that hypothesis by examining the history of reinsurance and reinsurers in the U.S. since the nineteenth century using both archival and printed primary sources and concludes that where large, domestic reinsurers are blocked by costly regulations, direct writers will turn to alternative forms of sharing risks, including ARTM and foreign and reciprocal reinsurance.

Dutch reinsurance and the first wave of globalisation

Ben Gales

In the Netherlands, the breakthrough of reinsurance coïncided with the internationalisation of insurance during the last quarter of the 19th century. That is of life-insurance. A few, new companies internationalised, much in opposition to the established firms and the prevalent national orientation; also of indirect business. Reinsurance was used as a technique to ease expansion and to strengthen international contacts. However, management often had mixed feelings about this component of their business. The financial sector and Dutch insurance in particular became more global than the rest of business, but globalisation ended more sorrowful than in the “real” sector. Were those mixed feelings an indication that globalisation was more of a frail affair than management wanted to be aware of? And did reinsurance signal that globalisation came at a price, but was that message simply repressed?

In the Netherlands, the breakthrough of reinsurance coïncided with the internationalisation of insurance during the last quarter of the 19th century. That is of life-insurance. A few, new companies internationalised, much in opposition to the established firms and the prevalent national orientation; also of indirect business. Reinsurance was used as a technique to ease expansion and to strengthen international contacts. However, management often had mixed feelings about this component of their business. The financial sector and Dutch insurance in particular became more global than the rest of business, but globalisation ended more sorrowful than in the “real” sector. Were those mixed feelings an indication that globalisation was more of a frail affair than management wanted to be aware of? And did reinsurance signal that globalisation came at a price, but was that message simply repressed?

Swedish Reinsurers in the Non-Life Sector

Mikael Lönnborg

The paper discusses the emergency and development of the Swedish reinsurance industry in the non-life sector. In addition, the paper will focus on major events that changed the circumstances and conditions for conducting reinsurance and how the business were organised. In Sweden, the reinsurance in the non-life sector was closely connected to direct insurance and within almost every larger (and to some extent in medium-sized) insurance group, an ‘independent’ reinsurance company was created. However, this changed considerably during the 19th and 20th century, in particular after heavy losses. In addition, the reinsurance business became an important part of expanding on foreign markets. In short, this paper will revolve around the issue of how the non-life reinsurance business shaped the setting of the Swedish insurance industry.

The paper discusses the emergency and development of the Swedish reinsurance industry in the non-life sector. In addition, the paper will focus on major events that changed the circumstances and conditions for conducting reinsurance and how the business were organised. In Sweden, the reinsurance in the non-life sector was closely connected to direct insurance and within almost every larger (and to some extent in medium-sized) insurance group, an ‘independent’ reinsurance company was created. However, this changed considerably during the 19th and 20th century, in particular after heavy losses. In addition, the reinsurance business became an important part of expanding on foreign markets. In short, this paper will revolve around the issue of how the non-life reinsurance business shaped the setting of the Swedish insurance industry.

The ups and downs of French reinsurance in the 20th century

André Straus

Even though the first French professional reinsurance companies dated back to the end of the 19th century, on the eve of the Second World War, foreign reinsurers dominated the French market. And in 1929, the largest French company accounted for only 10% of Munich Re premium volume and 15% of Swiss Re's premium volume. Fifty years later, the first French company, Scor, created in 1970, accounted for 14% of the premiums collected by Münich Re and 18% of Swiss Re's figure. And in 2014, Scor represented 35% of Munich Re and 42% of Swiss Re. Among the world's leading reinsurance companies, Scor's growth had been spectacular. These are the rhythms and factors (acquisition of technical expertise, international expansion) of this growth of a newcomer who has become in 45 years the 5th largest reinsurer in the world, along with the evolution of French reinsurance that this communication seeks to identify.

Even though the first French professional reinsurance companies dated back to the end of the 19th century, on the eve of the Second World War, foreign reinsurers dominated the French market. And in 1929, the largest French company accounted for only 10% of Munich Re premium volume and 15% of Swiss Re's premium volume. Fifty years later, the first French company, Scor, created in 1970, accounted for 14% of the premiums collected by Münich Re and 18% of Swiss Re's figure. And in 2014, Scor represented 35% of Munich Re and 42% of Swiss Re. Among the world's leading reinsurance companies, Scor's growth had been spectacular. These are the rhythms and factors (acquisition of technical expertise, international expansion) of this growth of a newcomer who has become in 45 years the 5th largest reinsurer in the world, along with the evolution of French reinsurance that this communication seeks to identify.

2nd half

Currency constraints, risk spreading regulation and the corporate demand for reinsurance. A national reinsurance market in the Spanish Autarky (1940-1959)

Pablo Gutiérrez & Jerònia Pons

As a channel for risk diversification, reinsurance is essentially an international business. This global scope makes it extremely sensible to regulations on the access to international capital and foreign exchange markets. Indeed, while soft regulations during the nineteenth century allowed for the spreading of reinsurance, increasing restrictions posed during the twentieth century deeply affected the development of the industry. In the Spanish case, the international isolation of Franco dictatorship from 1940 and the implementation of an autarkic economic policy led to a strict intervention on the trade of capital and foreign currencies, which would transform the Spanish reinsurance business. Indeed, the obstacles to the access to international risk diversification services forced Spanish insurers to seek for alternate mechanisms as the creation of dependent reinsurers linked to the main primary insurers. The aim of this article is to examine these strategies and their effects on the Spanish insurance market.

As a channel for risk diversification, reinsurance is essentially an international business. This global scope makes it extremely sensible to regulations on the access to international capital and foreign exchange markets. Indeed, while soft regulations during the nineteenth century allowed for the spreading of reinsurance, increasing restrictions posed during the twentieth century deeply affected the development of the industry. In the Spanish case, the international isolation of Franco dictatorship from 1940 and the implementation of an autarkic economic policy led to a strict intervention on the trade of capital and foreign currencies, which would transform the Spanish reinsurance business. Indeed, the obstacles to the access to international risk diversification services forced Spanish insurers to seek for alternate mechanisms as the creation of dependent reinsurers linked to the main primary insurers. The aim of this article is to examine these strategies and their effects on the Spanish insurance market.

Role of foreign reinsurance in the setting of insurance in Spain, 1960-2000

Leonardo Caruana

The reinsurance industry will be mainly in hands of foreign companies or explained in another way, they are the leaders in the process in Spain. In all moment they will sustain the risk of the insurance industry. This paper will concentrate in the second half of the XX century to explain how the international reinsurance companies diminish the risk and reinforce the insurance business in a useful way to make possible that Spain joins the develop countries in this matter. In many ways, this is a general process in many countries, because reinsurance is mainly a business that is concentrated in few countries that expand in all the world, and in fact we should mainly refer to few companies that control or support the reinsurance development in the world and naturally main purpose, the insurance industry.

The reinsurance industry will be mainly in hands of foreign companies or explained in another way, they are the leaders in the process in Spain. In all moment they will sustain the risk of the insurance industry. This paper will concentrate in the second half of the XX century to explain how the international reinsurance companies diminish the risk and reinforce the insurance business in a useful way to make possible that Spain joins the develop countries in this matter. In many ways, this is a general process in many countries, because reinsurance is mainly a business that is concentrated in few countries that expand in all the world, and in fact we should mainly refer to few companies that control or support the reinsurance development in the world and naturally main purpose, the insurance industry.

German insurance and reinsurance companies under the Nazi Regime

Christopher Kopper

Due to the strict foreign currency regime, one might believe that National Socialist Germany was not a favorable place for internationally oriented reinsurance companies. But as a consequence of their position as foreign currency earners, the authorities of the Nazi regime subjected reinsurances only to a rather liberal prudential supervision. The paper will show how reinsurances like Munich Re navigated through the polycratic regime of the “Third Reich” and managed to keep a significant agency in domestic and foreign business. As a quid pro quo for non-interference into their underwriting business, insurances were under pressure to invest significant parts of their reserves in treasury bonds to finance the German war effort. In addition, the paper investigates the fact how and why insurances escaped the looming threat of nationalization despite significant pressure from Nazi Party activists.

Due to the strict foreign currency regime, one might believe that National Socialist Germany was not a favorable place for internationally oriented reinsurance companies. But as a consequence of their position as foreign currency earners, the authorities of the Nazi regime subjected reinsurances only to a rather liberal prudential supervision. The paper will show how reinsurances like Munich Re navigated through the polycratic regime of the “Third Reich” and managed to keep a significant agency in domestic and foreign business. As a quid pro quo for non-interference into their underwriting business, insurances were under pressure to invest significant parts of their reserves in treasury bonds to finance the German war effort. In addition, the paper investigates the fact how and why insurances escaped the looming threat of nationalization despite significant pressure from Nazi Party activists.

From public expenditure to reinsurance: government intervention in rural insurance markets in Mexico 1960-2000.

Gustavo Del Angel

Crop insurance and in general insurance to the rural economy is an activity with several market imperfections, which have led the State to make interventions in it. This research explains the historical development of agricultural insurance and reinsurance in Mexico in from the 1950s to the 1990s. It focuses on explaining how agricultural insurance and later reinsurance provided by the government began. The central argument of this paper is that the adoption of an agricultural reinsurance practice by the government was aimed at avoiding large fiscal losses and reactivating private markets. By using reinsurance, the fiscal losses were reduced. However, the government did not fully activate the rural insurance markets since it continued to intervene in the crop insurance markets with political purposes. On the other hand, the practice of reinsurance required a learning process, so it was not successful in its beginnings.

Crop insurance and in general insurance to the rural economy is an activity with several market imperfections, which have led the State to make interventions in it. This research explains the historical development of agricultural insurance and reinsurance in Mexico in from the 1950s to the 1990s. It focuses on explaining how agricultural insurance and later reinsurance provided by the government began. The central argument of this paper is that the adoption of an agricultural reinsurance practice by the government was aimed at avoiding large fiscal losses and reactivating private markets. By using reinsurance, the fiscal losses were reduced. However, the government did not fully activate the rural insurance markets since it continued to intervene in the crop insurance markets with political purposes. On the other hand, the practice of reinsurance required a learning process, so it was not successful in its beginnings.

An introduction of life reassurance into Japan before WWII; A product or Institution?

Takau Yoneyama

In Japan, life reassurance didn’t grow naturally. This is not only because of technical problems, but also because of luck of necessities for life reassurance. It is natural for life insurers that life reassurance was not appeal to a device of risk management, partly because the industrial organization was very stable. If there are needs for life reassurance in those days, it might be a useful to a start-up company and a countermeasure to infectious disease. In the meantime, a Germany reinsurance company send its officers to Japan for promoting life reassurance about 1930. They paid attention to substandard insurance in Japan. Someone discussed a problem on substandard whom life insurers gave refusal to be policyholder. The answer to the life assurance was not that a life insurer made a private contact with life reassurance companies, that they tried to make a reassurance company all together. It is an evidence...

In Japan, life reassurance didn’t grow naturally. This is not only because of technical problems, but also because of luck of necessities for life reassurance. It is natural for life insurers that life reassurance was not appeal to a device of risk management, partly because the industrial organization was very stable. If there are needs for life reassurance in those days, it might be a useful to a start-up company and a countermeasure to infectious disease. In the meantime, a Germany reinsurance company send its officers to Japan for promoting life reassurance about 1930. They paid attention to substandard insurance in Japan. Someone discussed a problem on substandard whom life insurers gave refusal to be policyholder. The answer to the life assurance was not that a life insurer made a private contact with life reassurance companies, that they tried to make a reassurance company all together. It is an evidence on a trend toward institutional solution, rather than market.