Ocean president Michael Butt. Bermudian companies used Lloyd's as a way of achieving spread. David Fox reports The 12th International Reinsurance Congress Reinsurance industry professionals have been told to brace themselves for a fresh wave of insurance insolvencies.

"You won't have to wait long,'' former president and CEO of Mid Ocean Ltd., Michael Butt promised yesterday during a luncheon speech. "There are going to be some coming quite shortly.'' But in response to a leading question during the 12th International Reinsurance Congress event at the Princess Hotel, he conceded the system of insurance regulation in the US was cumbersome for American insurers.

He agreed that US regulation was a major "inhibitor'' to the latter day practice of insurance, especially at a time when firms must use new, global strategies to position themselves for the future.

American insurers have privately complained for years that, unlike any other country, US insurance regulation unnecessarily tied their hands, and slowed opportunity for advancement and flexibility.

"I love areas of the world to have major structural problems,'' Mr. Butt quipped, "because they create opportunities for others. So, long may it last.

"But if it wasn't there, you wouldn't invent it. It is the daftest system in the world, and creates as a result, major opportunities elsewhere.

"You couldn't possibly justify inventing it now, but that's the history.'' The reinsurer said the entire industry was surprisingly late in joining the cross-industry bandwagon of going global. At the time of Mid Ocean Re's 1992 formation, even the world's top four reinsurers were only regional players.

But since that time, the entire industry has been moving towards globalisation, and towards scale and spread as a part of the desire for global reach. He observed, "From the Bermudian companies' point of view, it was something that we were always going to evolve into. Analysts and the press said that we didn't stay true to our cause.

"But I thought that was really a very silly analysis, because we were always going to have to go to scale and spread. What we had, was the advantage of a base here. But we had to expand.

"And the fact that ACE and Exel used Lloyd's as a main way of achieving scale and spread, I think, was in retrospect, relatively self-evident.'' Bermuda companies took the unique opportunity to invest in Lloyd's, an opportunity brought about by Lloyd's need to re-build and create a new financial base to support its business.

"That opportunity was never going to happen again. You can get the advantage of licences, the spread through the Lloyd's network and no pre-1992 tail. It was a unique opportunity to achieve many of the things that we needed, at what I believe was relatively fair value for both sides at the time.'' A challenge for the industry in the future will be assembling the right team to execute necessary strategies for success.

Right now, there's a necessity to maintain high underwriting standards in the difficult period of continued soft rates and heavy competition.

He forecast the trend among top reinsurers to gain market share will continue, a product of the flight to quality.

Reinsurers who can, seek to be among the top players, and balance that goal against the desires of clients. But larger firms are needed because the clients (insurers or major commercial organisations) are getting bigger, themselves.

Mr. Butt said, "If you look at a Daimler/Benz Chrysler, or BP Amoco, what are their insurance requirements, as opposed to themselves as independents? The strength of the balance sheet is changing, as indeed the size of the insurance companies' balance sheets are getting larger and larger.'' Mr. Butt pointed out that market capitalisation of British insurers declined significantly in recent years against US and European insurers in a survey he recently completed.

He raised the alarm that there were "major structural, tectonic changes going on in our industry that we don't even notice. Quite major.

"And certainly, I believe the insurance industry has only just begun what it has to in terms of consolidations.'' Consolidations in the broking industry had left some reinsurers with two brokers supplying them with 60 percent of their business.

He agreed that more data was being made available in the industry than in the past, but better analytical tools were needed to maximise the benefit of the data.

"There will be much more progress,'' he said. "I certainly hope so, because intuitive underwriting remains the plague of our industry. Too much business is written on market forces, as opposed to the substance of the price. And that is something that we really need as an industry to improve on.'' Companies today are balancing performance expectations of investors against rating agency requirements.

And the biggest firms are becoming major asset managers, balancing assets against liabilities and working them more closely together, as they consider capital efficiency.

Further coverage of the congress: Page 37 SOUNDING A WARNING -- Michael Butt