Consolidation, low premium rates, globalisation, the rapid development of the alternative market, securitisation, and the use of new technology have been the major driving forces in the current insurance market. As insurers world-wide attempt to reposition themselves in the changing markets, consolidation has become the major force, with moves in the Bermuda market mirroring those in other markets. Delegates to the World Insurance Forum will be looking around the room wondering who's negotiating the next move. There were a record number of mergers during 1998. The merger of Citicorp and Travelers topped the list last year at about $36 billion. The merger has implications for the securitisation of insurance risk. Berkshire Hathaway chairman Warren Buffet did his bit with a $22 billion stock swap to get hold of General Reinsurance Group, the third-largest reinsurer in the US. American International Group Inc. took a step into the annuity business with the $18 billion acquisition of SunAmerica Inc. Gerling Global Reinsurance Corp., GE Capital Corp., St. Paul Cos., XL Capital Ltd. (the new name of Exel Ltd.), ACE Ltd., and Partner Reinsurance Co. Ltd., Commercial Union were all individually making their own acquisitions and mergers during the year. The move toward acquisition is a symptom of an industry with large amounts of capital to deploy, and wondering how best to use it in a down cycle of low prices. The $15 billion in estimated property catastrophe losses in 1998 didn't relieve the pressure on the downward trend. The Insurance Services Office Inc.

estimates that it was the worst year for catastrophic losses since 1994 -- the year of the Northridge, California earthquake. The 1999 January renewal season seems to have continued the down cycle in rates. National Underwriter magazine estimates rates in the property and casualty market fell from five to ten percent in the property and casualty reinsurance market. Some companies are simply walking away from business at the current pricing levels, leaving others to leave the field to others at what they consider unprofitable rates.

Liberty Mutual went so far as to decide it couldn't earn an adequate return on invested capital in the current market conditions and got out of the business by putting reinsurance subsidiary Liberty Re into runoff. That's a sign that some capital is leaving the sector. Whether the market bottom has been reached will be a topic for debate. In the property and casualty market near term investment prospects were describe as bleak by A.M. Best analysts, with overcapitalisation and the inability to invest that capital in new business cited as a cause for concern. Moody's Investors Service, another pessimist, has placed loss warnings for 30 percent of the Lloyd's marketplace. Meanwhile, rating agency Duff & Phelps put out an optimistic report on the beleaguered property and casualty market earlier this year, stating that it doesn't anticipate a broad change in the commercial lines pricing for the rest of 1999. In believing that rates have bottomed out the agency was upbeat about the long term prospects of the property and casualty industry based on continued demand for its products. While life and annuity insurers are facing losses of market share to mutual funds and banks that offer substitute savings-oriented products, and health insurers lose ground to lower-cost substitutes, the property and casualty market doesn't face any real alternative competition. The growth of direct securitisation of insurance risks by policyholders, or by banks acting as underwriters have not yet had the kind of material impact envisioned by the proponents of such moves, Duff & Phelps stated. Convergence is occurring but not at the rates predicted by proponents of the sector. However some insurers are anticipating the eventual rise of securitisation as a major force and are developing the ability to meet the challenge when it does hit the market in a big way. In recent weeks analysts have cited Bermuda-based Exel and Mutual Risk Management as being on the forefront of the securitisation wave. On a more immediate front Duff & Phelps believes the longer-term trends toward self-insurance, consolidation of both commercial policyholders and insurance brokers, and globalisation will remain the dominant factors in the industry. Last year's growth in the captive industry certainly bears out part of that prediction. Tillinghast-Towers Perrin estimates the total number of captives worldwide as 4,135, up from 3,966 in 1997, and continuing an 18-year upward trend. The captives had premium of $21.3 billion and total capital and surplus at $54 billion.

Bermuda continues to be leader in the alternative risk market Premiums increased 18 percent over 1997 figures, while capital and surplus increased by 20 percent.

Bermuda continues to lead the world in attracting new captive insurance formations according to Tillinghast's annual study.

The trend indicates companies are opting to self insure through a captive rather than take advantage of the current availability of inexpensive commercial insurance in the market.

In 1998 new captive licenses totaled 305 worldwide, with strong growth concentrated in Bermuda, the Cayman Islands, and Vermont followed by Guernsey, the British Virgin islands and Barbados.

Tillinghast noted the growth in the addition of unrelated business, the beginning of some employee benefits programmes, and the use of alternative risk financing in the sector. The rent-a-captive business also experienced strong growth. Group or rent-a-captives are designed for smaller companies that can't afford to establish a captive independently.

Insurers will have to continue to redesign products and services to capitalise on the trend of self-insurance and other forms of alternative risk transfer.

A.M. Best estimates the alternative market -- which includes captive insurers, self-insurance pools and risk-retention groups -- accounts for more than one-third the major insurers and reinsurers premiums.

The insurance companies will also have to move faster in lowering their costs.

Mergers among the brokers and corporations in general has put buying power into a smaller group of large insurance buyers. Larger, cost efficient insurers with global abilities will be favoured in the new markets while small speciality companies will survive as niche players.

Investment analyst Paine Webber believes the successful companies will steer away from a single-distribution system by going global and cited Bermuda as a domicile of choice to operate from.

Looking ahead, the emerging issue in 2000 will be the Year 2000 computer problem. Liability associated with Y2K is considered to be the second-most important financial-risk rating issue for property and casualty insurers after catastrophe risk according to A.M. Best.

Those writing directors and officers policies must also be concerned.

How does Bermuda fit into the global picture? Investment analyst Paine Webber believes the successful companies will steer away from a single-distribution system by going global and cited Bermuda as a domicile of choice to operate from.

If so then more than a few overseas visitors at the World Insurance Forum will be looking at more than the view outside the conference rooms when they arrive in Bermuda.

Industry trend: ACE Ltd.'s purchase of Cigna Corp.'s property casualty insurance business was just part of a worldwide trend of consolidation.

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