Tiny country shoulders big burden

Switzerland is one of the world leaders in the reinsurance business, claiming both the biggest – Swiss Re – and the tenth-biggest – Converium – specialists as its own.

This sector has become a necessity over the years, with the Swiss economy relying heavily on exports of finished products and machines.

Reinsurance is what the name says: cover for insurance companies. This allows these firms to unfetter themselves from some of the risks (financial loss, weather, epidemics) inherent to the contracts signed with clients.

“Reinsurers intervene when risks become too big for normal insurance companies to handle,” explains André Dubey, a professor at Lausanne University.

For the insurer, cutting its risk rhymes with savings, efficiency, stability and security – words that are usually music to Swiss ears.

However, if the world’s two biggest reinsurers – Swiss Re and Munich Re – have their headquarters in Switzerland and southern Germany – it’s probably for economic reasons rather than sociological ones.

“Switzerland, like the rest of Europe, became an industrial powerhouse at the end of the 19th century,” Dubey told swissinfo. “The birth of reinsurance was probably due to the fact that the Swiss exported machines and finished products.”

Old trade

Reinsurance was born in the 14th century, when a Venetian ship-owner sending a cargo to Holland asked a colleague to take on the risk for the perilous journey around the Iberian Peninsula.

Its modern incarnation appeared in Germany as insurance companies struggled to provide cover for blossoming industrial complexes.

Cologne Re was founded in 1846, followed by similar firms in Switzerland, France, Belgium and Austria. Among these new companies were Swiss Re (1863) and Munich Re (1880).

Tied to the ups and downs of the economy and wars around the world, the sector’s development in the 20th century was marked early on by the 1906 San Francisco earthquake and the fire that ensued.

Swiss Re was already involved, and it was a key turning point in its own – and the sector’s – development.

For the company, it led to a host of research projects, both technical and scientific. It also raised questions about how risk was considered, how it was handled, changed the sector’s evolution, and modified management techniques.

Fresh competition

Today, the reinsurance sector covers most markets around the world. Besides the Swiss and the Germans, US companies also dominate the sector, with upstarts from Bermuda providing some fresh competition.

“In Europe, Swiss Re and Munich Re are reinsurance specialists,” said Dubey. “Elsewhere, reinsurance is handled by divisions of existing insurance companies or subsidiaries.”

For the insurance specialist, Switzerland is among the biggest providers of reinsurance services because of Swiss Re, adding that the fact that the company’s headquarters are in Switzerland is not that important.

In fact, the norm is to hedge one’s bets by spreading risk far and wide.

“When you are dealing with natural catastrophes for example, it doesn’t make much sense to be insured in a country and for reinsurance cover to be issued in the same place,” Dubey said.

Accordingly, reinsurance is by essence an international business. However, most companies limit their activities to developed nations.

Swiss Re is often called the “home of a thousand trades”. To provide reinsurance services or simply advise clients, it has engineers and doctors to name but a few of the professions on its books.

“The best earthquake specialists are for example employed by reinsurers,” said Dubey. “Their influence is also far more important than their original job descriptions.”

swissinfo, Pierre-François Besson

In brief

A reinsurer assumes part of the risk and part of the premium originally taken by the insurer.

Reinsurance effectively boosts an insurer’s capital and therefore its capacity to sell more coverage.

Reinsurers have their own reinsurers, called retrocessionaires.

Reinsurers don’t pay policyholder claims. Instead, they reimburse insurers for claims paid.

Key facts

There are 150 reinsurance companies around the world.
Swiss Re is the world’s biggest, while Converium is ranked tenth.
Companies received SFr222 billion (including SFr31 billion for Swiss companies) in premiums in 2004.
Swiss firms account for 16 per cent of the global market.
Switzerland is fourth behind Germany, the US and Bermuda.