Introduction
This article was first published in Quantum magazine.
There is a real possibility that the global reinsurance market, a business that generates US$200 billion in annual premiums, will be significantly reshaped in the next two decades as the economic balance of power shifts towards the emerging markets.
Reinsurance today is still dominated by the large European-based players such as Munich Re, Swiss Re, and Lloyd’s, and by Bermuda-based providers such as ACE and XL Capital that have emerged since the 1980s.
These leading firms, though, could face a major struggle to retain their position. And there are the first signs that emerging market countries are prepared to use their rapidly growing wealth to challenge the dominance of traditional Western players.
The growing power of the new economies is clear for all to see—and the fragile and anemic recovery of the West from the recent financial crisis, coupled with the specter of crippling sovereign debt crises, has reinforced the view that this is a long-term trend that will reorder the global economy.
By 2020 or shortly thereafter, the combined GDP of emerging economies is expected to surpass output in developed markets, and China is projected to have replaced the United States as the world’s largest economy.
Globalisation 2.0
But, most significantly, there is a new dimension to this trend, commonly referred to as “Globalisation 2.0.” Until recently, globalization was understood solely to mean Western companies setting up manufacturing facilities in China or call centers in India. Today, however, emerging markets are investing their vast surpluses in US Treasuries and other developed-world asset classes, and their corporate giants are making inroads into Western markets by acquiring arms of prestigious brands such as IBM, Jaguar, Land Rover, and Volvo.
These seismic shifts will have significant implications for global reinsurance markets, which still seem to operate according to the principles of Globalisation 1.0: that is to say, a system where Western providers offer underwriting capacity and related reinsurance services cross-border and/or establish subsidiaries, branch offices, or representative offices in emerging markets. Generally, they “export” a contingent form of capital, drawing on the strength of their global balance sheet.
Although Globalisation 2.0—the rise of domestic reinsurers in emerging markets capable of challenging the regional and global dominance of traditional Western players—still seems to be a long way off in the world of reinsurance, there are indications that this is about to change slowly.
There are challenges, of course. The emerging powers need to enhance the international diversification of their underwriting portfolios in order to reap the benefits of improved capital efficiency and to attract and retain the best and the brightest, demonstrating a truly global perspective on recruiting talent.
On the positive side, there is anecdotal evidence that the rapidly growing nonlife and life insurance companies in emerging markets are developing an increasing appetite for dedicated domestic reinsurance capacity. One of the key reasons for this is that the emerging markets’ enormous surpluses make them increasingly less dependent on capital support from mature industrialized countries.
Domestic sovereign and nonsovereign investors—such as Dubai Group and Khazanah Nasional from Malaysia, which hold the majority of the world’s largest shariah-compliant reinsurance company, ACR ReTakaful Holdings Limited —do have the funds to establish new reinsurance entities or beef up existing ones, and will be able to develop an increasing comfort and familiarity with the reinsurance sector.
In line with this development, the financial strength of national and regional reinsurers with local roots has improved markedly, even though it remains underwhelming from a global perspective.
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