It's only a matter of time before smaller reinsurance brokers either consolidate among themselves, or are absorbed by the top three, the industry was warned this week.

This view was expressed by a banker to the reinsurance industry, Chase Securities Inc. vice president, global insurance, Daniel G. Serrao.

He was speaking during a presentation at the 12th International Reinsurance Congress, organised at the Hamilton Princess Hotel by Hawksmere plc, in association with PriceWaterhouseCoopers.

Recent developments in the broker market include the continued acquisition of their competitors by the largest players (J&H) Marsh & McLennan and Aon.

Mr. Serrao said the first tier of players now ended with the third largest broker (Willis Corroon), which would force second tier players to consolidate among themselves to avoid being acquired by the top three.

He also discussed corporate moves to provide operating capital to the Lloyd's market.

Bermuda insurers are providing 45.8 percent of the total insurance-backed capacity at Lloyd's for the current 1998 underwriting year -- and more than ten percent of the total Lloyd's capacity.

Meanwhile, the world's reinsurers are facing increasingly sophisticated clients, the emergence of non-traditional competitors such as insurance brokers and banks, and the general stagnation of traditional premium.

It has resulted in a highly concentrated market, where 59 percent of the world's $90 billion of reinsurance premiums are handled by the top five reinsurers (Munich Re, Swiss Re, Employers Re, General Re and Lloyd's). The top ten account for more than three quarters.

"Consolidation,'' he said, "together with the flight to quality, has concentrated business into fewer hands.'' Mr. Serrao points out that apart from $22.9 billion in total insured natural catastrophes in 1992 (Hurricane Andrew) and $17.4 billion in 1994 (Northridge earthquake), catastrophes have been less severe in recent years.

Insured natural catastrophes totalled $7.4 billion in both 1995 and 1996, $2.6 billion in 1997 and $4.6 billion for the first six months of 1998.

The most dramatic results are evidenced from Bermuda's cat reinsurers which have posted strong and improving results since 1994.

An average of combined ratios for the Bermuda companies (including Mid Ocean Re, PartnerRe, IPC Re, Tempest Re, RenaissanceRe and LaSalle Re) shows annual declines (59.7 percent in 1994, 53.6 percent in 1995, 44.4 percent in 1996 and 40.1 percent in 1997). "The favourable loss experience,'' he said, "along with significant gains in the investment portfolios, have created a large glut of capital in the system, which has grown significantly in the past ten years.'' But premium growth in the industry has lagged and a major decline in operating leverage has been the result. On a worldwide basis, total reinsurance premium growth (life and non-life) dropped to negative percentages in 1997 -- shrinking from $94 billion to $90 billion.

"When you combine low capital utilisation, declining premium rates and investment assets with low yields, you get an inadequate return on capital,'' he said.

"Industry wide, that is roughly eight percent. Notable exceptions include the leading reinsurers.'' Mr. Serrao discussed the globalisation, diversification and niche acquisitions in the market, including moves by Bermuda insurers such as ACE Ltd. and Exel Ltd. to acquire Bermuda cat reinsurers.

He said the fact that acquisitions were now typically being made with cash, instead of stock, indicated that these companies had quite a bit of cash that they were seeking to deploy, in another effort to return capital to shareholders. He said the issuance of risk-linked securities was accelerating as securitisation was driven by the convergence of the $16-trillion capital markets with the insurance and reinsurance markets.

"Although the market is still small in absolute terms,'' he said, "the securitisation effort is showing strong growth recently with the number of deals in 1998 reaching a total of 14, with the transactions in areas in addition to property catastrophe where this market really started.

"Within property catastrophe, there is a growing diversification of risks securitised as investors look to grow the potential investments in their portfolios and look for diversified risks with cat exposure.'' The insurance linked deals are increasingly excess-of-loss, now favoured over the initial interest in quota share and they are not as expensive to the issuer as they were when the earlier deals were put together.

Size will continue to matter in the global reinsurance industry, he concluded, but instead of "naive capacity'', reinsurers would need to be global players and require significant resources devoted to technology and research and development.

BUSINESS BUC