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A History of US

A History of US Insurance

Introduction 2

From emerging to global power: 1850–1950 4

Becoming a mature market: 1945–1990 20

Swiss Re 38

1995 to present 46 Introduction

Insurance and the emergence of a nation

When explorers first set foot on the shores of a New World, they could have hardly foreseen what lay ahead. In the coming decades and centuries, America – as it would be called – grew from a few modest settlements hugging the coast to a broad, expansive and dynamic society. No country in the world would experience such accelerated social and economic development on the scale of the .

This dizzying pace of progress would not have been achieved or sustained without the support of the insurance .

Today the US insurance market is the world’s largest – accounting for some 27% of total global insurance premiums. It is also one of the most sophisticated. Indeed, American has fueled the development of many leading-edge products and risk management strategies.

But that was not always the case. The United States, a global economic and political power today, was in a sense the emerging market of its time two centuries ago – full of promise and fraught with peril.

Like emerging markets today, the United States proved to be an irresistible opportunity for insurers, but success was built on hard work and tough lessons: learning to navigate a unique and often onerous regulatory system, facing catastrophes of epic proportions and exposure to the vagaries of a pro-consumer system – to name a few.

Over the years, the insurance industry has met the challenge of protecting assets in an increasingly complex world – proving resilient in the face of the terrorist attack of September 11, 2001, in 2005 and the 2007–08 financial crisis.

The in the United States mirrors the history of the nation. Insurance has attended dramatic population growth, the emergence of commerce and the elevation of finance. Insurance has helped fuel the nation’s prosperity. It wouldn’t be a stretch to say that without insurance, can’t be established, buildings can’t be built and planes can’t fly. If the first chapter of the history of insurance in the United States was about facilitating progress, the future holds many questions of in the face of emerging risks.

2 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 3 4 From emerging market to global power: 1850–1950

The US domestic insurance market pre-dates the founding of the nation itself, tracing its roots to colonial with the United Kingdom in the 1700s.

The first domestic and mutual marine As and commerce flourished, insurers were already well established so did the non- market. before the Revolutionary War, and at least By 1880, per capita insurance spending ten companies were created in in the United States equaled that of the two decades following the Declaration the United Kingdom, having been only of Independence in 1776 – including the one-sixth just 30 years earlier. first US joint stock insurer, The Insurance Company of North America (INA) – Although several associations were founded in 1792. established in the early 1700s to provide care for widows and orphans of their More companies would follow and by members, US life insurance developed the mid-1800s most states had a at a much slower pace than property wide assortment of enterprises writing and casualty. insurance . In 1812 the first true life insurance compa- Following the Civil War, with the opening ny was formed in the United States as of new territories in the West, the US The Pennsylvania Company for Insurance enjoyed one of its most sustained periods on Lives and Granting Annuities. Other of economic growth and rapidly became companies soon followed, and from 1870 the world’s largest economy by the end to 1895 life insurance in force increased of the century. nearly six-fold as companies introduced industrial and whole life policies.

Preceding pages: “The Burning of the United States Steam Frigate Missouri at Gibraltar, 1843.”

Left: The Tontine Coffee House in New York, ca. 1797. This meeting place for stockbrokers was built at the north-west corner of Wall Street in 1793. Broker activity included trading stocks and insurance.

Swiss Re A History of US Insurance 5 From emerging market to global power: 1850–1950

Early foreign contribution Building reputations Foreign insurers gained a foothold early By 1913, a total of 89 foreign companies on, beginning a lasting relationship from 14 nations were operating in the between the US market and overseas US. UK companies, in particular, invested insurers and reinsurers. heavily in the United States. According to some estimates, US premiums accounted The United States was an important for 40% of British premiums between market for some UK insurers in the mid- 1870 and 1914. 1800s, in particular for insurance linked to the cotton trade. However, the period US domestic non-life insurers were also of Reconstruction after the Civil War flourishing around this time, with a few – saw many more insurers from Canada, such as INA – even venturing overseas. Germany, Russia, and the But with attractive growth opportunities United Kingdom attracted to the United at , their diversification into markets States and its expanding economy. outside the United States would remain limited, even after World War I. Foreign insurers were soon writing sig- nificant volumes of business in the United US life insurers were more successful States. By 1881, around 25% of US fire in their overseas expansion. The top premiums were underwritten by foreign three – Equitable, New York Life and insurers – with some UK insurers Mutual – were all active overseas. outgrowing their domestic US rivals.

Top: wearing the uniform of the Union Fire Company which he founded in in 1736. In 1751 Franklin met with other fire-fighting societies and suggested forming a fire insurance company.

Above: A meeting invitation of the New Fire Society from the early 1800s. Members of fire societies pledged to help one another in case of a fire and were required to provide buckets and other equipment to extinguish .

Right: Immigrants often formed their own insurance companies and appealed to clients coming from the same country.

Opposite top: The Equitable was one of many US insurers to spread globally during the 19th century.

Opposite left and right: Advertising insurance was practiced very early in the USA. Later it was imitated also in .

Overleaf: in Rochester, N.Y., 1865.

6 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 7 8 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 9 From emerging market to global power: 1850–1950

No easy ride While the dramatic increase in insurable assets that accompanied economic expansion created opportunities for insurers, those insurers found that con- ducting business in the United States was not without challenges.

For much of its history, US insurance has been highly regulated. Unlike other markets, US insurance regulation was and continues to be governed by a complex set of state and federal rules, self-regulation and international standards.

Besides the relatively high cost of doing business in the United States, catastrophe and other losses kept many companies from turning a profit. Although every state had licensed foreign insurers in 1914, 53 foreign insurers had exited the country between 1861 and 1914. Top: Signing of America’s First Charter for Mutual Life Insurance in 1835.

Above: An around 1890.

Overleaf: New York Fire Insurance Patrol.

10 Swiss Re A History of US Insurance Regulation in the US: Free enterprise has its costs

Regulation has been an important developed in a fragmented manner and To underwrite business in the United in shaping the US insurance market and with additional expense to both domestic States, foreign companies were required a major challenge to foreign insurers. and foreign companies. to demonstrate their commitment and invest in US securities, a practice that Despite heated debates on the role of State regulation encouraged many US would have particular relevance during federal government, most recently after insurers to invest in their local markets, the 1929 stock market crash and the two the 2008 financial crisis, insurance regu- and not seek diversification across bor- world wars. lation has largely been drawn along state ders. It also led to a lack of diversification lines, although federal statutes and self- along product lines. For much of the past Stringent deposit requirements imposed regulation also play a part. 150 years, US insurers tended to specialize by some states on foreign insurers in the in only a single line of business. After 1800s dissuaded some from entering the After the American Revolution, states World War II, most restrictions on multiline market and led many to participate only were united in a loose federation but were finally removed. through rather than pay the continued to be governed by their own price of state regulation. legislatures, a factor that has resulted Historically, state regulators have focused in differing rules and regulations across on solvency and consumer protection, While state regulation encouraged the the nation that survive to this day. As a which has included oversight of pricing, creation of state-based local insurance result, the US insurance market has availability of cover and claims. This has markets rather than a national one, insur- proven particularly relevant in catastro- ance have coordinated their phe-exposed states, especially those like efforts nationally. In 1871, the National California where insurance commission- Association of Insurance Commissioners Below: ers are elected. (NAIC) was formed, which to this day The illustration shows Thomas F. Ryan, continues to develop model and J. Pierpont Morgan, John D. Rockefeller, and Edward H. Harriman as sheikhs listening to Insurance regulation has also historically provide a platform for regulators to dis- Grover Cleveland, labeled “Insurance Arbiter”. had a protectionist dimension, with regu- cuss changes and communicate with the Cleveland was a trustee of the stock of the lators applying specific rules and capital wider insurance sector. Equitable Life Assurance Society and head of requirements for non-US companies. the Association of Life Insurance Presidents.

Swiss Re A History of US Insurance 11 12 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 13 From emerging market to global power: 1850–1950

Reinsurance – a European affair The quake demonstrated Swiss Re’s value Rapid expansion Despite America’s exposure to large proposition to clients. By transferring The US economy was growing, and the hurricane and perils, the rein- some of their risk to Swiss Re, they could increasing awareness of potential risks surance market started slowly and largely withstand the losses of catastrophic from disasters like the remained the domain of foreign compa- proportions. earthquake was a boon to the reinsurance nies. Overseas companies accounted industry in the United States. for 90% of reinsurance at the end of the Within four years of the earthquake, in 19th century. 1910, Swiss Re opened its first branch Opening a US branch signified Swiss Re’s in New York, putting itself on a path toward intent to make a long-term commitment US insurers favored other often less becoming an integral part of the US to the US insurance industry. It helped the effective forms of spreading risk, including insurance industry. firm position itself as a key player, linking co-insurance agreements and insurance its fortunes to those of its US clients, a exchanges. They remained dangerously factor that was to prove important in the undiversified and exposed to both turbulent war years ahead. man-made and natural disasters, a fact reinforced by the losses incurred in the and Boston fires of 1871 and 1872, and later in the San Francisco earthquake of 1906.

A place in the market The potential of the US reinsurance market was clear from an early in Swiss Re’s development.

Its first venture into the country was to reinsure the US business of its trusted partners, including its founding partner Helvetia in 1873. German insurer Prussian National Insurance Co. built a substantial business in San Francisco, regularly ceding business to Swiss Re.

Perhaps nowhere was expansion as fevered and dramatic as in the Golden State. California experienced extraordinary growth in the late 1800s and early 1900s and the accumulation of insurable assets attracted many insurance interests, including Swiss Re. However, Swiss Re’s focus on the rapidly growing California market was to have an unfortunate outcome. The 1906 earthquake, which is generally regarded as a pivotal moment for the US insurance market cost Swiss Re around USD 1.65 million and the USD 850 000 net property loss remains the single largest loss in its history Above: as a percentage of annual net earned Swiss Re opened its first US branch in 1910. non-life premiums.

14 Swiss Re A History of US Insurance The plan was to grow Swiss Re’s fire treaty competitors. After the war, German Tragedy would strike in other forms during business and launch a new US casualty insurers were banned from the US insur- the decade. An outbreak of the large reinsurer. Together with other investors, ance and reinsurance markets, and the influenza pandemic in 1918, later dubbed Swiss Re launched the European Accident Russian Revolution in November 1917 “the Spanish flu,” served as a reminder of Insurance Co. Ltd. in 1920, the first caused a withdrawal of Russian insurers. the challenges of diversifying certain risks licensed professional accident and casu- internationally. If such a pandemic were alty insurer and reinsurer in the United The US insurance market emerged from to hit the US economy today – with 30% States. the war in relatively good shape, as of the workforce becoming ill and 2.5% domestic insurers increased their market dying – the total cost would be around The outbreak of World War I in Europe share. From 1910 to 1920, the four USD 700 billion. in 1914 would lead to structural changes top domestic fire insurers collectively in the US insurance market and transform increased their premiums by 150%. US life insurers took a big hit, although Swiss Re’s position as it helped fill Swiss Re would become established as demand subsequently increased, as the void left by the rapid decline of its the leading professional reinsurer in the did prices. US market.

Above: Because the Titanic was considered unsinkable it had only been insured for half of its value and at a very low rate. The Titanic’s sister ship Olympic could later only find insurance at a much higher rate.

Above right: Swiss Re’s loss card for the Titanic.

Right: The Spanish flu was a pandemic that spread across several continents. Between 1918 and 1920 it infected ca. 500 million people across the world and killed 50 to 100 million of them.

Swiss Re A History of US Insurance 15 From emerging market to global power: 1850–1950

Roaring Twenties The 1920s ended with a crash – the Swiss Re included, found it increasingly The 1920s witnessed the rise of the collapse of the US stock market in 1929. difficult to communicate with their over- consumer culture and the advent of mass The optimism of the 1920s was soon seas headquarters. marketing. Insurance followed the trend replaced by the harsh realities of the Great as a staple of most households, providing Depression of the 1930s, the worst eco- The political upheaval of World War II had financial cover in the event of a loss of nomic downturn of modern times. From a dramatic effect on Swiss Re’s business assets or property. At this time Swiss Re 1929 to 1933 US gross domestic pro- in the United States, where it had become was reinforcing its leading position in the duct fell from USD 104 to USD 56 billion. a well-established cog in the insurance US market through enhanced marketing machinery. By 1941 the -based and regulatory filings. As early as 1923 Just as insurance was becoming a funda- company was the largest fire reinsurer it used the term “North America” in the mental driver of the economy, it was in the country, with net premiums 50% name of its operations. impacted by losses from steep greater than its nearest rival. declines in the stock market and by US consumers eagerly adopted the latest shrinking demand for cover. As the econ- The war made the transfer of documents technology – buying radios, domestic omy slowed and soared, between the Zurich headquarters and appliances and automobiles. In turn, premiums fell 30%. the US subsidiaries impossible; all corre- of automobile insurance increased By 1934, fire insurance premiums had spondence was carefully monitored although cars proved easy to steal, which fallen to the lowest level in 20 years. under the terms of the 1917 Espionage became a problem for insurers and for Act. The crucial flow of cross-border a time resulted in higher premiums which The length and severity of the Depression funds was also severely impeded by the many consumers found unaffordable. triggered the New Deal, with its provisions war, creating huge liquidity and foreign of welfare and creation, and reshaped exchange risks for international insurers attitudes toward risks and insurance. and reinsurers like Swiss Re. During this period, unsustainable eco- Below: nomic conditions and increasing regulation Nevertheless, Swiss Re made a bold During World War II, Swiss Re together with drove many foreign insurers out of the US. statement of commitment to the US market the Red Cross shipped to prisoners and transferred all US operations and of war including American soldiers. Within a decade of the stock market assets to a US entity. All shares in the US crash, Europe was again plunged into operations were transferred to a holding Below right: war. Foreign insurers and reinsurers, company held in trust by US citizens. Photograph of a train collision from Swiss Re’s collection of accidents and catastrophes. Swiss Re started collecting both written and visual information on accidents and disasters in the 1950s to improve its risk .

16 Swiss Re A History of US Insurance Life insurance – Evolving from mortality to longevity risk cover

Compared to property and casualty, life doing business in central Europe were hit times that in Germany. The growth in the insurance developed rather late in the hard and forced to leave markets. They stock market coupled with rising employ- United States. Initial solutions followed were punished twice because they also ment and affluence as well as and an the examples previously set in Britain. had to watch their assets in European aging population were the driving forces As elsewhere, mortality was the first risk securities crumble. behind the life industry’s growth during to be insured. In the early 18th century this time. colonial fraternal societies had to take Following World War II, American care of widows and orphans on behalf of insurance companies focused on By 2010, US insurance expenditures their members. their home turf. As the industry grew and totaled USD 1.2 trillion, almost 8% GDP. the population’s affluence rose, the insur- Life premiums account for 44% of total In their quest for growth British, Canadian ance industry branched out into new premiums or roughly 20% of global life and German insurers intensified competi- products. By 1965, total life insurance expenditure. tion in the US, following the end of the contracts were nearly three times Civil War. They hugely benefited from the higher than their 1945 levels. As a Over the last 30 years, the life business rising productivity of the US economy. percentage of their disposable income, has posed new challenges to the indus- By 1880, per capita insurance purchases during the 20 years following World War try. One of the biggest was the AIDS epi- equaled British consumption. By 1905, I, Americans increased the amount they demic discovered in the 1980s. Swiss Re life premium income accounted for about spent on life, , and health by 50%. invested heavily in R&D for offering solu- 5% of US GDP. As life insurance increased In the 25 years following World War II, tions to insure HIV infected people. AIDS in relevance, some of its lines, like work- property and casualty increased eleven and the associated lowering of medical ers compensation became compulsory fold; life, health and annuities multiplied limits also contributed to the further de- while others became part of America’s eightfold. velopment of so-called preferred criteria. social security scheme. A further major challenge is increasingly US life penetration grew earlier and more becoming apparent with the protection By the early 20th century, life insurers rapid than in most other developed gap for ageing populations. Swiss Re seemed to thrive. Many companies countries and much of it came in retire- closely cooperates with clients and indus- adopted the mutual form of organization ment- and investment-oriented products. try organizations and is today offering a to build confidence. Steadily, low-income By 1990, individual and group annuity range innovative products for the protec- families started to buy life insurance. The products accounted for well over 60% of tion gap with insurance-linked securities. advent of the First World War put an end life premium volume in the United States, to global expansion. US life companies twice the percentage for Japan and ten

Above: Lincoln National Life Insurance headquarters in Fort Wayne, Indiana, inaugurated in 1923.

Right: Physical exercise of employees at an insurance company in New York around 1900.

Swiss Re A History of US Insurance 17 From emerging market to global power: 1850–1950

1929: A wakeup call

The exuberance and optimism of the In the early decades of the 20th century, When the merry-go-round stopped in 1920s came to an abrupt end with the US capital markets attained a position 1929, Swiss Re and other insurers suf- 1929 stock market crash and the Great of worldwide prominence as the country fered losses as share prices plunged. The Depression of the 1930s. offered profitable investment opportuni- company reported total write-downs of ties and stable exchange rates. CHF 26 million between 1930 and 1938, The crash had huge implications for insur- although it was able to tap reserves held ers, triggering massive losses from volatile Insurance companies benefited from the in Zurich. In 1931 some CHF 30 million investment markets and exchange rates attractiveness of equities, with most was taken from the reserve pool to cover and setting the stage for years of falling fire companies enjoying double- and even losses on the asset side, nearly exhaust- revenues. In the longer term it would lead triple-digit returns on their . ing the fund. to fundamental changes in financial With 80% of fire insurers’ investments services regulation. in financial markets, the bull market in Despite these losses, Swiss Re emerged insurance stocks became a self-fulfilling from the financial crisis in good shape, prophecy. maintaining its high and report- ing profits throughout the crisis. During this time Swiss Re increased its Below: weighting in equities, buying stocks in In 1936 it had a 40% share of the US Bankers and insurance men in 1923. railroad companies, public utility bonds reinsurance market and 18% of the global and government and industrial . market. At the end of the decade it re- Below right: It experienced significant growth in its mained the world’s largest reinsurer and Scene of panic in Wall Street, New York, underwriting business during this period strong enough to survive the turmoil of 24th October 1929 and was obligated by insurance regula- World War II and the near collapse of the tions to invest a large share of its premi- international insurance market. Opposite: ums in the US market. Wall Street panic in 1884

18 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 19 20 Swiss Re A History of US Insurance Becoming a mature market: 1945–1990

The decades following World War II were fraught with political and social upheaval, but they were also a golden age of growth for the United States with prospering American culture, business and technology.

The expanding economy and burgeoning The rise of American technology and consumer-driven market provided fertile culture ground for the US insurance industry, Post-war America proved to be an eco- which began to take on a new sophisti- nomic powerhouse, fueling the global cation, reflecting developments in economy and breaking new ground in risk management and . technology and culture.

Insurers responded by developing The United States offered an aggressive products to protect an evolving world yet strong and stable market in the uncer- of assets, but the advent of prosperity tain Cold War era. While large parts of the brought about changing social attitudes, world slipped behind the Iron Curtain or market distortions and some volatility. struggled to emerge from colonial rule, America was buoyed by new confidence. Seduced by high investment returns and overconfidence, the industry underpriced After the setback, the risk at a time of rising claims inflation and United States were again prospering, unfavorable legal developments. The enjoying growth levels last seen prior to resulting liability crisis hit insurers and World War I. their reinsurers with massive unexpected losses, causing a ripple effect felt by markets around the globe.

Left: The post war boom eventually also benefitted the insurance industry which set about insuring the American life style.

Swiss Re A History of US Insurance 21 Becoming a mature market: 1945–1990

For the entire 20th century the US was to lead the world in technological innovation, and consumer goods and services.

Industrialization took on a new form, with the likes of Henry Ford introducing the concept of mass production, while growth in the consumer demand for goods was unrivaled.

In the first decades of the century, consumers were attracted by the unprecedented freedom and thrill offered by the automobile and in successive years embraced new technologies including the latest household appliances, radios, televisions and computers.

The post-war years saw rapid growth in transportation, the emergence of megacities, the space race and satellite technology, as well as great strides in medical sciences and the more recent development of the Internet. Entire industries were conceived, including the earliest commercial airlines, energy firms, global consumer brands and entertainment.

Above and opposite: and life insurance were among the fastest growing sectors after World War II.

22 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 23 Becoming a mature market: 1945–1990

Insurers build on economic success Home market opportunities As US insurers built momentum in the On the back of growing consumer demand In contrast to the pre-1914 expansion post-war economic boom, fewer foreign and the success of US business, the overseas by US life insurance companies, companies participated in the market. domestic insurance industry responded post-war insurers remained firmly focused Although some UK insurers still ranked with products that helped consumers on opportunities at home. With a strong among the top 20 US insurers, foreign protect their assets. As a percentage of domestic market, US insurers generally companies represented only 170 out of disposable income, Americans were trailed US corporations that were 4,800 US insurers in the 1970s. spending 50% more on life, annuity and expanding overseas and growing increas- in the 20 years after ingly multinational. Reinsurance, however, was a different the end of WW II. By 1965, the number story. Foreign reinsurers continued to play of life insurance contracts was almost There were a few exceptions. Companies an important role in the US reinsurance three times higher than in 1945. such as American International Group market. By 1977, US insurers ceded more (AIG), American Foreign Insurance Asso- than USD 1.4 billion to foreign reinsurers Auto insurance also grew exponentially, ciation (AFIA) and INA continued to build and assumed USD 1 billion, a threefold with premiums rising tenfold in the on their overseas ventures in the period increase in seven years. 25-year period following World War II. between the world wars. AIG, in particular, grew to become the world’s largest non- Swiss Re reinforces its core position Demand for commercial insurance also life insurer, its name synonymous with Swiss Re emerged from World War II increased with the success of US business, international diversification and innovation in a strong competitive position in the but the scope of challenging engineering until its near-collapse in the 2008 financial United States. The company maintained projects – from larger and more complex crisis. its holding structure developed during manufacturing, infrastructure and aircraft World War II which reinforced its American – were now beyond the capacity and However, despite increased access to identity, and injected more capital into expertise of a single insurer. newly opened foreign markets, only one its US subsidiary. US insurer ranked among the ten largest These risks required a new level of multinational insurers in 2003. By compar- During the 1950s and 1960s Swiss Re expertise and risk management not readily ison, three were Swiss and two German. created a separate entity for its Canadian available within the ranks of US insurers. business and opened offices in Atlanta, A few large expert reinsurers such Chicago and San Francisco. as Swiss Re were able to extend their capacity to reinsure these single, large risks in collaboration with insurers and large corporate clients.

Below: The Michigan of 1944 required the Secretary of State to have licenses confiscated of drivers who could not pay liability claims.  (2013) Mansutti Foundation.

Right: From Swiss Re’s collection of accidents and catastrophes.

24 Swiss Re A History of US Insurance Facing the new geo-political landscape Commercial insurance premiums doubled of the post-war period, Swiss Re sought in the 1970s, with general liability to further diversify by opening offices in and malpractice premiums increasing by Australia, South and across Asia. some 150%. During this time reinsurance The development of this global network premiums tripled. benefited its US clients as Swiss Re was positioned to further diversify US natural However, the 1970s were a turning point catastrophe risks by writing exposures for the US insurance market. The favorable with a low correlation to those in the claims and investment experiences of the United States – Japanese , 1950s and 1960s left the insurance for example. market overconfident and ill-prepared for the losses and turmoil to follow. By the end of the 1960s Swiss Re looked back at a very successful period since it The 1970s saw a breakdown of interna- first wrote reinsurance on US business in tional monetary agreements reached in 1873. After virtually no growth during the the immediate aftermath of World War II. war years, its US life and nonlife premiums The nation was entering an extended increased six- and tenfold, respectively. period of economic uncertainty marked The company’s US business now by rising inflation and volatile exchange accounted for one-quarter of the group’s rates. This would become a major total revenue, almost twice that of the challenge for liability insurers that might next largest country – Germany – and as not pay claims until many years after much as France, Belgium, Switzerland writing a policy. and the UK combined. Naïve capacity The turning tide The heady profitability of the 1950s and America’s post-war economic boom pre- 1960s yielded to a turbulent period in the sented an opportunity and posed a threat 1970s and 1980s. Fierce competition to the nation’s insurers and reinsurers. and high investment returns led to a feeling of hubris that would prove costly. Insurance The expansion of the economy naturally markets reacted and underwrote at drove topline growth. However, many unsustainably low premium rates – either direct insurers not only wrote more busi- blind to or in denial of the long-term ness but also broadened cover – often consequences. without adjusting rates or understanding the risks. Litigation and decisions reflected the growing emphasis on the concept Reinsurers like Swiss Re were eager to of liability; consumers were awarded support insurers in expanding their port- unprecedented sums, which placed an folios but also exercised a measure of unforeseen financial burden on companies caution when engaging in covers where and their insurers. there was inadequate understanding of the underlying dynamics. Reinsurers like Swiss Re would suffer losses far greater than anyone would have forecast, triggering a period of insurance market volatility not previously seen in the United States.

Top: Swiss Re’s offices on 245 Park Avenue in the 1970s.

Above: Until the mid-1990s, Swiss Re in the USA operated under the name North American Reinsurance Company.

Swiss Re A History of US Insurance 25 Becoming a mature market: 1945–1990

Opportunities and challenges Swiss Re was also able to increasingly But as the losses mounted, about half the Despite headwinds in the benefit from economies of scale, such reinsurers in the market left by the mid- market, the overall US insurance market as increased technical sophistication 1980s, putting pressure on those that continued to grow throughout the 1970s and product development. However, the remained to take on more risk and support and 1980s. From 1960 to 1985, property reinsurance market remained competitive their clients or make the tough decision and casualty insurance premiums and few recognized that some of the to walk away from unprofitable business. increased from around USD 15 billion to fundamentals needed to change. about USD 144 billion. Life insurance Spiraling liability costs and competitive premiums grew at an even more impres- Counting the cost pressure on pricing hit reinsurers like sive rate over the same period, from In 1979 only three of the top 13 reinsur- Swiss Re hard, as many of its clients around USD 586 billion to approximately ance companies operating in the United faced unanticipated asbestos liability and USD 6 trillion. States had a combined ratio below pharmaceutical product liability claims. 100%. Unprofitable underwriting was The growth was good news for reinsurers being supported by high investment Compounding this predicament, the like Swiss Re, but it also signaled the returns, which wouldn’t last forever. company typically underwrote pro advent of new ways to assume risk and rata reinsurance, which meant that it more players. Larger insurance companies Insurers continued to compete aggres- shared the losses of clients. Even excess and corporations started retaining business sively in the 1980s, reducing rates reinsurance, triggered only by very high and self-insuring through the increasingly and taking on more risk. Just as rates losses, produced unexpectedly large popular option of a captive insurer. were falling, demand exploded for claims, some dating back to the 1940s Competition was also heating up for commercial covers capable of taking and 1950s. established reinsurers, with new entrants on higher risks. and high investment returns raising The liability crisis also added new admin- the stakes. New, inexperienced entrants were istrative costs for reinsurers as disputes attracted to the commercial insurance became protracted. Litigation between There were still opportunities for reinsurers, market, fueling competition and driving insurer and reinsurer – once a rarity – however. Reinsurance accounted for down rates. So-called cash flow under- became more common and disputes just 3.6% of total nonlife premiums in the writing became popular, with its focus more difficult to resolve as the focus mid-1980s and US companies facing on volume instead of profit. At a time moved to a legal interpretation of contracts increasingly complex risks sought the help of double-digit interest rates, insurers rather than one based on goodwill. of technically capable global reinsurers believed that they could offset under- like Swiss Re. writing losses with investment returns.

Above: Insurance office in the 1960s.

Opposite: Continental Insurance pavilion at the 1964 New York World’s Fair.

26 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 27 Becoming a mature market: 1945–1990

Large losses: Disasters that shook (and shaped) a market

Catastrophic events – natural and man- The 7.9 magnitude earthquake that shook made – have been a defining feature of the city in 1906 was a turning point in US the US insurance market from its earliest insurance history. It caused approximate- days. ly USD 10 billion of damage at current rates, with two-thirds of the damage from From the fires that destroyed cities in the fires that swept through the city’s pre- 1800s to the San Francisco earthquake in dominantly wooden structures. 1906, from the World Trade Center ter- rorist attack in 2001 to Hurricane Katrina Forty-three companies paid around in 2005, catastrophes have helped drive USD 4.9 billion of claims at today’s values, demand in the world’s largest insurance equal to the insurance market’s entire and reinsurance market. 47 years of profit. Although most foreign insurers weathered the catastrophe better These events – costly in both loss of life than their US counterparts, they were and in economic terms – highlight the po- also rocked by big losses. tential scale and concentration of catas- trophe losses in the United States and the In addition to the financial consequences, need for foreign capital and expertise. the quake also exposed a lack of insurance and reinsurance standards in what was The US is particularly exposed to natural still a very localized US insurance market. disasters – from the powerful hurricanes in Gulf Coast states and the East Coast to Although some 90% of the earthquakes that have rocked California, in San Francisco carried fire insurance, Washington and the Midwest. earthquake risk was not considered insurable and therefore not covered, while There is also the history of costly man- many companies excluded fire following made disasters. The onset of urbanization an earthquake. and the preponderance of wooden build- ings led to devastating fires in many cities, As a result, some insurers paid no claims including New Orleans (1788 and 1794), while others went bust or tried to renego- New York (1776 and 1835), Detroit (1805), tiate policies. Top: Pittsburgh (1845) and Seattle (1889). The San Francisco Call-Chronicle-Examiner’s One of the most important lessons of the headlines after the earthquake in 1906. The San Francisco earthquake was quake was the need for diversification; one of the first natural disasters to have insurers with greater financial strength Above: a profound effect on the US insurance and international diversification proved San Francisco before the earthquake. market. more resilient and able to pay claims. Below: San Francisco in ruins.

28 Swiss Re A History of US Insurance Above: Refugees from the Chicago fire, 1871.

Right: Chicago burning, 1871.

Above: Loss adjusters in Boston, 1888.

Right: Dynamite was often the only way left to save surrounding buildings from catching fire. Dynamiting a fraternity house at the University of California in 1923.

Overleaf: After the 1923 Berkeley Fire.

Swiss Re A History of US Insurance 29 Becoming a mature market: 1945–1990

30 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 31 Becoming a mature market: 1945–1990

During this time Swiss Re broadened its Just two years later, a strong earthquake talent base to deal with the increasingly hit the California city of Northridge, 30 complex claims. A new unit was created miles northwest of downtown Los Angeles, to audit client data and the claims staff causing USD 20 billion in damage. was bolstered considerably. Andrew was one of the most powerful A shift in strategy was necessary to miti- to hit in the second half gate these developments, but it was not of the 20th century. Combined with the without its challenges. For example, while Northridge quake, the two events were writing excess reinsurance generates a wakeup call for insurers. Both illustrated higher returns from fewer expected losses the consequences of increasing concen- it generates less premium volume – trations of property values in catastrophe- which was needed to help smooth the exposed areas, notably the shorelines of loss ratios. Swiss Re spent much of the the Gulf of Mexico and California. 1980s writing just enough new casualty business to keep pace with its mounting The insurance industry’s response to losses. Hurricane Andrew was swift and the effects long lasting. A number of smaller But despite the challenges, Swiss Re’s insurers became insolvent and local nonlife net premiums grew from subsidiaries of national carriers required USD 4 billion to USD 7 billion in the 1980s, capital injections. The market for residential as it differentiated itself from other rein- and coverage in surers by its financial strength and access Florida all but vanished and catastrophe to its global underwriting and claims reinsurance prices soared while available expertise. limits were greatly reduced.

Storm of the century Insurers realized they had underestimated Up until Hurricane Katrina in 2005, the the likelihood and potential costs of most expensive natural disaster in US a large disaster striking a populated area. history was Hurricane Andrew 13 years Future hurricanes and earthquakes would earlier, which caused USD 22 billion force insurers to significantly improve in damage. With winds in excess of their understanding of exposures and the 200 mph, Andrew produced more than potential impact on their portfolios as well 700 000 claims across thousands of as examine new ways to transfer the risk. square miles.

Above: The aftermath of Hurricane Betsy, 1965.

Right: Accident in Pell City, Alabama, 1950. From Swiss Re’s collection of disasters and accidents.

32 Swiss Re A History of US insurance Risk management

The revolution in risk management of the As businesses expanded into new prod- Working alongside their brokers and 1960s and 1970s went hand-in-hand ucts and markets with the help of new insurers, risk managers have pioneered with developments in technology. Almost technologies and systems, they became the practice of enterprise risk management all new theory on pricing risk in the latter acutely aware of the risks that accompa- and the transfer of risk to third parties. part of the 20th century emanated from ny progress. Enterprise risk management US companies are among the largest users the US, with lasting implications for risk represented a more sophisticated approach of captives and have often been the first management and insurance around the to understanding risk, its identification, to embrace new insurance products such world. mitigation and potential transfer to third as directors and officers, environmental parties like insurers. impairment liability and more recently The growing size and complexity of cyber insurance. business and technology warranted a The US is home to one of the world’s new approach to risk, and the role of the most developed communities of risk US companies were also early beneficiaries risk manager was created. managers, represented by the Risk and of globalization, as auto manufacturers Insurance Management Society (RIMS). began operating overseas. The increasing Established in 1950, RIMS serves more size and complexity of risk as well as the than 10 000 risk management profes- expansion into foreign countries would sionals around the world through 81 lead to many in commercial chapters across the United States, Canada, insurance such as multinational insurance Below: Mexico and Japan. programs and eventually the use of cus- Risk management at Insurance tomized structured solutions. in the 1960s.

Swiss Re A History of US insurance 33 Becoming a mature market: 1945–1990

Liability crunch time

There was a heavy price to pay for the The largest losses were for environmental, The experience of asbestos, in particular, economic expansion of the 1950s and pollution and health hazards, with asbes- alerted insurers to the huge potential risks 1960s, due in large part to the runaway tos-related claims being the largest single from emerging or unexpected liabilities tort system. cause. and an aggressive plaintiffs bar. To this day, foreign reinsurers remain mindful of New developments in science, medicine, This mainly US phenomenon – of emerging the cost of underpricing casualty reinsur- industry and technology and a huge liabilities and huge increases in awards – ance and the potential impact of emerging increase in compensation by the was to have global ramifications, risks like cyber liability, nanotechnology created turbulence for US insurers. with international insurers and reinsurers and biotechnology. reporting losses and a reduced appetite The judicial system – redefined by the for casualty business. The liability crisis also had long-term emergence of and class actions – implications for commercial insurance, began to exhibit a greater tendency to fa- The liability insurance crisis came to a prompting insurers and companies alike vor the rights of the consumer. This, to- head in the 1980s, resulting in the insol- to look at new ways of managing and gether with a broadening of evidential vency of a number of insurers while retaining risk. Increased retention levels standards and doctrines of culpability, others withdrew cover or stopped writing and consolidation among US insurers made it easier and potentially rewarding casualty lines altogether. The dramatic produced a long-term decline in demand to sue. The number of dramati- reduction in the availability of casualty for casualty reinsurance. cally increased, as did the size of awards. insurance and skyrocketing of insurance and the need to only estab- prices that followed had serious conse- As a result of the liability crisis, many lish a degree of guilt made companies an quences for US businesses and consumers. large US companies began retaining more easy target and potential goldmine for risk and self-insuring; even as the casualty compensation. Medical malpractice and product liability market showed signs of improvement in were the first to suffer but workers the mid-1990s, risk retention mechanisms During the second half of the 20th century compensation, general liability and later would remain a viable alternative. US tort costs rose from 0.6% of GDP to professional liability and directors and 2.2%. In the early 1980s some US insurers officers insurance were hit with large were spending as much as 25% of their claims. premiums on legal expenses. The cost of liability insurance and the Insurers had written business on com- difficulty obtaining it – especially in the pletely different assumptions of the likely healthcare sector – became a significant frequency and cost of claims. The ex- political issue, with lawmakers lining up panded concept of liability and the long- either on the consumer or corporate side. tail nature of casualty insurance meant It eventually led to a broad wave of tort that insurers were hit with claims in the reform, as many states enacted legisla- 1980s they had not anticipated or priced tion limiting jury awards. This helped for when the policies were underwritten relieve the pressure but a shortage in in the 1960s and 1970s. insurance capacity remained for some time.

Opposite: Time Magazine in 1986 cover on the liability crisis.

Cover image from TIME Magazine, March 24, 1986 © 1986 Time Inc. Used under license. TIME Magazine and Time Inc. are not affiliated with, and do not endorse products of, Licensee.

34 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 35 Becoming a mature market: 1945–1990

In particular, Andrew was a boost to the Significantly, Andrew ushered in the age in alternative risk transfer solutions made nascent catastrophe modeling industry. of capital markets in insurance risk. It these attractive areas for investment. Swiss Re increased its investment in its encouraged insurers and reinsurers to own models and in-house expertise and turn to new capital market products like At the same time the US operations now employs modelers, climatologists catastrophe bonds, an area in which became more integrated with the rest and other scientists to better understand Swiss Re has built considerable expertise of the company as Swiss Re began to hurricanes and the damage they cause. in the intervening years. operate more as a global business under a single brand with a single capital base. Hurricane Andrew also kick-started Investing in the US market investment of a different kind. Investors In the mid-1990s Swiss Re sold its The 1990s saw Swiss Re invest further in helped establish a property catastrophe holdings in primary insurance and service its US operations – boosting capital, insurance and reinsurance market in companies to reinvest and focus on simplifying and integrating legal entities Bermuda. Swiss Re helped form Partner Re, its core reinsurance business and develop and investing in staff, IT and data collec- one of several pure catastrophe reinsurers capital market solutions. Its goal was to tion. In 1999 the company moved its US established in Bermuda in the years become the number one global reinsurer, headquarters from midtown Manhattan following Andrew. and the US market was key to achieving to Armonk, New York in Westchester this goal. County.

Divestments freed up CHF 5 billion, which As the 20th century came to a close, Swiss Re reinvested into further growth Swiss Re’s US operations accounted for of its life business, increasing the global 50% of the reinsurer’s global business, non-life operations and developing allied with expectations that they would grow Below: . The trend toward more further over time. Florida City after Hurricane Andrew costly catastrophes and opportunities in August, 1992.

36 Swiss Re A History of US Insurance Embracing capital markets

Just as companies Swiss Re was an early adopter of capital became a viable concept with the devel- markets and innovative risk transfer opment of actuarial practices, advances techniques. In the 1980s it founded New in statistical modeling and innovations York-based Atrium to look at new ways in financial products enabled insurers and of assessing and transferring risk and in reinsurers to explore alternative risk transfer 1993 established a division known as products in the 1980s and 1990s. Alternative Risk Transfer to tap into new markets for handling risk. Investors Insurers developed potential new com- embraced the concept of insurance- mercial risk products that ranged from linked securities because the risks were multi-line multi-year insurance policies to largely uncorrelated with the financial those that incorporated financial products markets risks in their portfolios. like derivatives or swaps. For example, an insurer could offer cover for a combination Swiss Re established a relationship with of insurance and financial market risks. the Zurich-based investment and Such a could cover potential bank to develop new prod- catastrophe losses and a decline in equity ucts and meet the insurance and financing markets. needs of financial markets and Fortune 500 companies. Some of these experimental products were more successful than others. The The lines between banking and insurance Above: most enduring is the , were beginning to blur and it was becom- Swiss Re insurance-linked securities brochure, which has become a market in its own ing possible to transfer risks like natural 1996. right, attracting investors and insurers catastrophes, life risk and even motor to with the potential to transfer nonlife capital markets, as well as combine insur- and life insurance risks between the two ance and capital market products into largely uncorrelated markets. new solutions for large companies and public sector organizations. The first catastrophe bond was issued for a life insurer in the 1980s, but it took In addition to finding solutions for its Hurricane Andrew in 1992 and the result- clients, Swiss Re has also diversified its ing shortage of reinsurance capacity to portfolio by issuing billions of dollars ignite the insurance linked securitization of exposure from its own risks to capital market. Andrew forced insurers and rein- markets through catastrophe bonds, surers to examine new ways to protect including innovative mortality and longevity their balance sheets against major catas- insurance-linked securities. trophes like a hurricane or earthquake.

US companies used their risk management and financing expertise to package insurance risk and transfer it to capital markets. The first catastrophe future contracts were launched by the Chicago Board of Trade in 1992, and while the venture was ultimately unsuccessful, it was one of the first of many innovations to trade cat risk in capital markets.

Swiss Re A History of US Insurance 37 Swiss Re History

The evolution of a global risk expert

Swiss Re’s rise to become the global expert in taking and managing risks mirrors the dramatic social, economic and political development of the last 150 years. Swiss Re was established in 1863 to meet demand for an independent reinsurer that would spread risk in a rapidly changing world. The following 150 years, a period of unprecedented change driven by a revolution in science and technology, have seen Swiss Re become a leading international provider of reinsurance capital and risk expertise.

Rising from the ashes Swiss Re’s beginnings are often associated Instead, the St. Gallen-based insurer Rapid industrialization and urbanization with the devastating fire that destroyed Helvetia set up a new fire insurance throughout the 1800s were creating the thriving Swiss town of in company and shortly after its director concentrations of risk, requiring insurers May 1861. The fire, which hit some local Moritz Ignaz Grossmann proposed to diversify their exposures. A clear role insurers with claims five times their that a Swiss Reinsurer should be found- was emerging for independent reinsurers reserves, highlighted the threat of major ed in Zurich. The main reason for doing that could shoulder and spread insurers’ catastrophes to the Swiss insurance so, Grossmann wrote, was to keep reinsur- risks, develop expertise and provide industry and demonstrated the need ance premiums in Switzerland rather capital when it was critically needed. for reinsurance to provide protection than reinsuring with French and English for events with a low frequency but a yet insurers. The world’s first dedicated and indepen- unknown severity. Immediately after the dent reinsurer, Cologne Re, was establi- fire, the insurance industry discussed The Swiss Reinsurance Company first shed in the aftermath of the Hamburg fire setting up a cantonal reinsurance pool opened its doors in Zurich on 19 Decem- of 1842. Swiss Re was to be the first but the plans never materialized. ber, 1863, with CHF 6 million of share such company outside of Germany. capital raised from a diverse group of investors, including two Swiss banks.

Below: Swiss Re’s offices in 1983.

38 Swiss Re A History of US Insurance Fundamentals of success Swiss Re’s early leaders established the sound principles of reinsurance that have been followed by successive generations of Swiss Re managers ever since. From the very start, Swiss Re was to be an international reinsurance company that spread its risks geographically, built strong client relationships and developed access to a diverse capital base.

The early years were difficult for Swiss Re – reinsurance was a new concept that lacked the sophisticated risk management tools of more recent times. The primary insurance market was far from transparent. As a consequence, client relationships had to be rooted in trust and “utmost good faith” rather than knowledge and facts.

In these first challenging years, Grossmann turned to Giuseppe Besso, a member of the famous Besso family associated Clockwise from top left: with the Italian insurer Assicurazioni Giuseppe (Josef) Besso (1839–1901), brother of Marco Besso from Trieste, director of Generali Generali. Besso accelerated Swiss Re’s insurance. Giuseppe Besso was general manager of Swiss Re from 1865 to 1879. international diversification and continued to build the company as a financially robust Charles Simon (1862–1942), general manager of Swiss Re from 1900 to 1919 and later chairman of the board of directors. and independent reinsurer. Erwin Hürlimann (1880–1942), the first Swiss general manager of Swiss Re from 1919 to 1930. Later chairman of the board and honorary chairman.

Moritz Ignaz Grossmann (1830–1910), director of Helvetia Insurance and founder of Swiss Re.

Swiss Re A History of US Insurance 39 Swiss Re History

Diversified from the start The form of reinsurance contracts also Right from the start Swiss Re had an evolved – in 1890 Swiss Re underwrote international outlook, with only two its first excess of loss contract, a type of its 18 early contracts written with of reinsurance that pays claims above Swiss insurers. an agreed level of losses, rather than a proportion of all an insurer’s losses. By the turn of the 20th century Swiss Re was already reinsuring risks in Europe, This change in approach would enable the US, Latin America, Russia and Asia. reinsurers to focus on the less frequent It was also beginning to establish a global catastrophic risks. In a sense, the modern network, opening an overseas office and age of reinsurance had begun. looking to underwrite directly in key inter- national markets. Catastrophe losses The first few decades of the 20th century The reinsurer also looked to spread risk were marked by growth in both inter- across an increasing number of lines national exposures and single large of business, writing its first contracts in risks – demonstrated by the Spanish Flu marine reinsurance in 1864, in life rein- epidemic in 1918, which led to a surance in 1865, in accident and health CHF 1 million loss for Swiss Re, and by reinsurance in 1881, and in motor reinsur- the sinking of the Titanic in 1912, also Below left: ance in 1901. reinsured by Swiss Re. The company’s articles of association were approved on December 19, 1863, and signed by the famous Swiss author Gottfried Keller as a clerk of the Canton of Zurich government.

Below right: Swiss Re signed its first reinsurance contract with Helvetia, one of its founding companies, in 1863.

40 Swiss Re A History of US Insurance However, it was the catastrophic 1906 Financial crisis Post-war boom San Francisco Earthquake that was to be The 1929 stock market crash in the The technology boom and growing the insurance and reinsurance industry’s US and subsequent Great Depression concentration of risk in mature markets wake-up call. The earthquake and showed insurers and reinsurers for the after the Second World War led to subsequent fire that swept through first time that they were exposed to growing demand for risk management, San Francisco was a market-changing significant risks on the asset side of the and for greater expertise from insurers event. The extent of the damage made balance sheet. and their reinsurers. In response, Swiss Re insurers rethink the potential size of losses, looked to share its risk expertise through as well as the importance of seeking The crash led to write-downs of assets training and communication, a key part well-capitalized counterparties. at Swiss Re amounting to almost of the reinsurer’s business culture and CHF 26 million, although the company brand ever since. Within three years of the quake, was saved by its accumulation of special San Francisco had been largely rebuilt reserves – some CHF 30 million were It opened the Swiss Insurance Training thanks to payments made by the insur- taken from these reserves in 1931 to Centre (SITC) in 1960 to provide technical ance and reinsurance industry. The cover record losses. However, Swiss Re training, particularly to insurers in emerging majority of claims were paid by foreign learnt valuable lessons, and the crisis markets. Swiss Re’s sigma unit began companies, demonstrating just how glo- marked the birth of a more prudent asset publishing its trademark economic balized the industry had already become. liability management at Swiss Re, an research in 1968, and the unit continues important risk management tool that to generate some of the most valued data For Swiss Re, the earthquake generated continues to be used by insurers today. and analysis available on the insurance the biggest single loss as a percentage market. of net premiums in the company’s history, Redrawing the map but reinforced Swiss Re’s reputation as a While German and Russian reinsurers Focus on core business financially secure and reliable counterparty were expelled from international business In response to the growth in risk manage- in the US and the UK where the reinsurer around the time of the two world wars, ment and the trend towards greater self- honored its contracts to cedants. Swiss Re was able to capture a market- retention in the 1980s, Swiss Re began leading position in the US. However, expanding its range of services, acquiring Global market access the radically different world that would insurance service companies, as well as Above all else, the San Francisco emerge after the Second World increasing its participation in the primary earthquake highlighted the need for further War constrained reinsurers’ ability to insurance market. geographical and product diversification, spread risk. leading Swiss Re to make a number However, although dependent upon each of acquisitions. A number of markets were now off-limits other, Swiss Re discovered that the actual – with those in Central and Eastern management of a primary and a reinsu- Acquisitions were to feature early on Europe slipping behind the Iron Curtain. rance company had little in common. in Swiss Re’s history, and continue well Others, such as Brazil and India, became into modern times. In addition to helping state-owned. At the same time, other In 1994 a new management team spread risk internationally, acquisitions markets were enjoying a boom in consu- refocused the company’s operations back give access to new business, particularly mer spending, leading to higher concen- on reinsurance, reinvesting the proceeds where strong relationships between local trations of risk in markets like the US from the sale of its primary insurance insurers and reinsurers make it difficult and Europe. businesses in achieving its strategic goal to grow. of becoming the world’s largest reinsurer. Swiss Re continued to seek geographical Growing catastrophe exposures and an Early acquisitions saw Swiss Re gain and product diversification, developing increasingly complex and globalized risk footholds in the all-important UK and a leading presence in new markets, landscape were beginning to drive German markets through stakes in including Canada, Australia, South Africa demand for large, highly rated managers Mercantile and and then Asia. of capital and risk. Company (M&G) in 1915 and Bayerische Rückversicherung of Munich in 1924.

Swiss Re A History of US Insurance 41 Swiss Re History

Swiss Re sought to grow its life reinsurance business, headquartered in , and develop its insurance- linked securities offering. It also developed its direct corporate insurance unit and further globalized its non-life reinsurance operations.

In the 1970s Swiss Re had been one of the first reinsurers to recognize the importance of emerging markets. Later it began opening offices in key markets, seeking to build strong relationships and expertise through a local presence – Swiss Re obtained licenses in Korea in 2002, in 2003 and Japan and Taiwan in 2004.

During the 1990s, Swiss Re took on much of its current corporate form – it adopted a single brand operating from one global capital base, providing the highest levels of financial strength, expertise and tools to clients whilst remaining attractive to a wide range of capital providers.

New risk frontiers Following Hurricane Andrew in 1992, which was the largest insurance industry loss at that time, Swiss Re began working with Swiss bank Credit Suisse to develop alternative financial and risk transfer solutions.

Developments in actuarial modeling and a growing interest in hedging risk in the 1980s led Swiss Re to explore develop- ments in capital markets and bring new financial products to existing and new cli- ents. The growth in Swiss Re’s financial Above: products business helped forge lasting Swiss Re’s first office on the first floor of Schoffelgassse 1 in Zurich (house in the middle). relationships between reinsurers and capital markets that had not really existed before.

A new era was beginning, and capital markets had been opened up as a source of additional and complementary capacity. Innovative products were also being developed, including some of the first insurance-linked securities and public- private partnerships.

42 Swiss Re A History of US Insurance Top: Mythenquai 60 in Zurich, Swiss Re’s first purpose-built offices, opened in 1913.

Above: Swiss Re’s new office building at Mythenquai 50 in Zurich, planned for 2017.

Swiss Re A History of USInsurance 43 Swiss Re History

Market consolidation and expansion Swiss Re in London underwrote half Preparing for the future With strategy firmly fixed on its core of the USD 3.5 billion coverage for the In 2011 Swiss Re implemented a new reinsurance operations, Swiss Re WTC, and insurance claims from the legal structure to support its strategic strengthened its position by buying attack contributed to Swiss Re’s first net priorities and refine its business model. competitors in a number of markets loss since 1868. It took five years before a It created three separate business units, during the 1990s and 2000s. New York jury ruled in favor of Swiss Re namely Swiss Re’s existing reinsurance and other insurers in the largest insurance business, along with two new entities The company made a series of acquisitions litigation process ever, confirming the for Corporate Solutions and Admin Re®. in the life reinsurance market between attack was one event and not two, as the 1995 and 2001, mostly in the US but also owner of the WTC had claimed. The company also continues to invest reacquiring M&G. These acquisitions in the future. In 2003 Swiss Re opened formed the basis of Swiss Re Life & Health, The first decade of the 21st century its award-winning St Mary Axe building, the company’s global life reinsurance put into question the insurability of some affectionately known as the Gherkin, business centered in London, which large risks. Hurricane Katrina, which while work began on a new building at includes AdminRe®, an operation spe- produced the highest of any Swiss Re’s headquarters in Zurich in 2012. cializing in the acquisition and adminis- natural disaster in history, cost Swiss Re tration of run-off business. USD 1.2 billion. Although it demonstrated By staying true to the fundamentals of the ability of the industry to absorb reinsurance championed by Swiss Re’s Swiss Re’s largest acquisition was the devastating losses, within six years the early leaders – the importance of USD 7.6 billion deal in 2006 for GE toll of the 2005 hurricane season was diversification and long-lasting client Insurance Solutions, the fifth largest equaled by a string of natural catastrophe relationships – Swiss Re has weathered reinsurer at that time. The transaction events in the Pacific region. It started many storms in its 150-year history, reinforced the reinsurer’s leading position with in Australia, which were fol- continuing to provide its clients with in the US reinsurance market, but also in lowed by a sequence of earthquakes a secure partner in risk. other markets such as the UK or Germany. first in New Zealand and later in Japan, followed by a tsunami, and the year The history of the company shows the Challenging times finished with yet another flood in Thailand. pivotal role reinsurance has played in the The opening decade of the 21st century management of risk. And with Swiss Re was challenging for global insurers and The financial crisis of 2008 was also tough at the forefront, it remains well-positioned reinsurers, including Swiss Re. on Swiss Re. The company made a loss to carry on doing so. of CHF 864 million in 2008, mainly the The terrorist attack on the World Trade result of investment losses and the Center in 2001 not only cost three performance of two credit default swaps. thousand lives and billions of dollars in property damage, it also changed By de-risking its asset portfolio and insurers’ thinking about the possible size concentrating on its core reinsurance of losses and the interconnectivity and business, the company emerged accumulation of seemingly unrelated risks. from the crisis as a leading participant in the reinsurance market.

44 Swiss Re A History of US Insurance Above: , London, was opened in 2004.

Swiss Re A History of US Insurance 45 46 Swiss Re A History of US Insurance 1995 to present

In many ways the beginning of the New Millennium was a time of optimism. The benefits of globalization and technological progress were having a dramatic effect on the lives of millions around the globe, and brisk international trade signaled that the world’s economy was growing.

The terrorist attack of September 11, 2001, Interconnected risks claimed the lives of almost 3 000 people, Assessing the insured loss was a highly many of whom worked for insurance and complex undertaking; large claims were other financial services firms. In addition filed for a number of seemingly unrelated to the tragic loss of life, 9/11 ushered in a risks including aviation, property, liability period of persistent political volatility and lines, business interruption and life insur- global security concerns. ance. Losses and potential exposures were not confined to New York, either – The insurance industry shouldered much airlines were grounded, restrictive security of the economic burden. Insurers paid an measures were implemented and events estimated USD 23.8 billion, making 9/11 were cancelled throughout the US and the most costly insured man-made disaster around the world. ever – and, at the time, the second most expensive insured loss after Hurricane The size and complexity of losses would Andrew. force companies to think differently about risk. Insurers had suffered losses across The collapse of the Twin Towers at the different lines of business and geographies, World Trade Center demonstrated and saw before them unique and just how much the world had changed, previously unanticipated correlations of highlighting the global dimension of risk. risk. Also, although the stock markets remained reasonably robust in the after- math of 9/11, the attack brought the global economy to a grinding halt, due to uncertainty of the effect on global stocks.

Left: The lobby at Swiss Re Americas’ headquarters in Armonk.

Swiss Re A History of US Insurance 47 1995 to present

Insurers realized they could no longer offer Confluence of losses The dotcom bubble bursts on the same terms as While the magnitude of the loss was Insurers also had to contend with unstable in the past. Once offered as a blanket cover unexpected, so was the way insurance financial markets during this volatile period. with – and with little contracts evolved. The promise of huge efficiencies and for price and accumulation profitable new business models built on of exposure – terrorism cover was imme- Claims made for the events of Septem- the Internet created a diately withdrawn by all but a handful ber 11, 2001 revealed weaknesses in that burst in 2001. Investors flocked to of specialist insurers. commercial insurance contracts in the US dotcom stocks based on speculation rather and international markets. The World than substantiation. The combination The aviation and property insurance Trade Center loss was to lead to one of of startups raising and markets, however, were quick to respond the most significant insurance disputes spending aggressively without showing with alternative solutions, and the of all time, forcing the industry to change a profit was too much for the stock market standalone terrorism market was born. practices and rewrite ambiguous contract to handle, and the crash came when wording. companies filed for bankruptcy or shut- Over time the standalone terrorism market tered completely. would accommodate a broader definition The destruction of the World Trade Center of the risk – including political violence – was not the only major disruption for US Double whammy with a number of insurers providing insurers and their reinsurers during this The World Trade Center attack led to significant capacity. But in 2001 the world period. Financial market volatility and the Swiss Re’s largest loss in its by then 138- looked very different, very little cover was tort system were also causing immediate year history and contributed to its first available and the limited capacity came concerns, while the ever present risk of net loss (CHF 165 million) since 1868. at a very high price. Atlantic hurricanes would also come into Like other reinsurers, it suffered from the play. accumulated losses of different lines In the immediate aftermath of Septem- of business – including property, aviation, ber 11, the threat of more terrorist attacks At the close of the 20th century, the liability, accident and life, contributing was very real, but the risk was almost insurance industry was still reeling from to total 9/11-related claims of almost impossible to quantify. Swiss Re and other the liability crisis, which had forced CHF 3 billion. US insurers argued that terrorism expo- many carriers to bolster their reserves. sures must be strictly defined and limited, Asbestos claims had yet to hit their The dotcom bubble, followed by 9/11 and matched by adequate premiums if peak and the preponderance of litigation and the ensuing political uncertainty of the risk was to be transferred. along with unsustainable rates were wars in Afghanistan and Iraq, impacted causing problems for other liability lines. the investments of insurers and reinsurers, Insurers approached the federal govern- While still paying millions of dollars for causing many to write down the value of ment to help limit their exposures, enable asbestos claims, many insurers were also their assets and reduce their exposure them to offer reasonable and sustainable experiencing an unexpected volume of to equities. Some insurers, and European levels of terrorism cover and ensure that claims for professional lines like directors reinsurers in particular, embarked on an proper coverage would be available for and officers insurance due to accelerated program to strengthen their all insureds. The Terrorism Risk Insurance lawsuits and shareholder activism. risk management, governance and asset Act (TRIA) was signed into law in 2002, management. They fortified their systems providing a government-funded reinsur- to manage accumulations of risk ance backstop. TRIA was to be a tempo- and liabilities in their asset portfolios and rary measure to allow insurers to develop developed the first economic models. a long-term solution, but it has since been extended twice and is now set to expire in 2014.

Right: Store in December 1999 offering special deals for those worried about supply problems caused by the Y2K bug.

48 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 49 1995 to present

Captives

The concept of captive insurance has US regulations made it prohibitively ex- are domiciled in the United States, with actually been around for a long time. pensive to form a captive in the United 3 000 in the Caribbean and 1 200 in It hearkens back to the collective efforts States until the 1970s, when US onshore Europe and Asia. of Europe’s marine underwriters of the captives started to become a viable op- 1500s and the compa- tion. Initially captives were slow to take off, but nies formed by industries to provide the liability crunch of the 1980s and insurance coverage in the 1700s. Bermuda has traditionally been the domi- the hard market after the terrorist attack cile of choice for US companies, although in 2001 were major catalysts in their Today’s captives are a form of self-insur- changes in tax and insurance laws in the development. Today captives are held ance in which the insurance entity is 1970s and 1980s kick-started the on- by the vast majority of Fortune 500 com- wholly owned by the insureds. Captives shore captive industry. panies – particularly in the finance, real have regulatory and tax advantages and estate, construction and manufacturing – unlike traditional insurance – if claims In the 1970s, the first laws were passed sectors – and more recently there has fall short of premiums paid, the owners to encourage captive formation in Colo- been growth in the use of captives by keep the money and invest it. If claims are rado, and then Tennessee and Vermont. health care, property companies and life expected to exceed premiums paid, the According to the National Association insurers. insured will often turn to a reinsurer to of Insurance Commissioners, the number take the excess risk. of captives has nearly doubled in Although they don’t have the diversification recent years as more states have passed benefits of the insurance industry, captives The term “captive” was first coined in the or modified captive legislation. and other retention vehicles have proven 1950s by Frederic M. Reiss, a property an attractive and effective way to manage engineer turned insurance broker in Ohio. With close to 500 captives, Vermont is high frequency and low severity risks, In 1958 Reiss began helping corporations the largest onshore captive domicile in particularly in combination with loss pre- set up captives, mainly in offshore juris- the United States, followed by Utah and vention and risk management measures. dictions like Bermuda, although the Cay- Hawaii. They are also used by high-risk industries man Islands, Barbados and Guernsey are like energy and pharmaceuticals to fund now also popular captive domiciles, with There are now more than 5 000 captives infrequent but potentially high-cost many countries in Europe, Asia and the globally compared with approximately events like a major pollution event or a Middle East joining the list in recent years. 1 000 in 1980. More than 1 000 captives product recall.

Above: City of Hamilton and harbor, Bermuda.

50 Swiss Re A History of US Insurance All of this occurred at the end of a soft Swiss Re’s losses from Hurricane Katrina Most US insurers managed to successfully market. Low rates and increasing liability alone were around USD 1.2 billion, again navigate the financial crisis, and claims had started to erode the profits demonstrating the reinsurer’s ability to even AIG’s insurance units were largely of US insurers, and consequently price absorb the impact of exceptionally large unaffected as it was the company’s firming began to appear in some com- catastrophes and help its insurer clients non-insurance Financial Products unit mercial lines. The losses of September 11 manage their losses. which prompted the federal government’s accelerated this trend, and almost intervention. Life insurers Hartford Finan- overnight the cost of insurance increased In what was to prove an exceptional year cial, Lincoln, Principal Financial, significantly. for insurers, Hurricanes Wilma and Rita and sought assistance caused USD 35.6 billion of insured dam- from the government’s Troubled Asset The hardening market for insurance age in the same year. This came on the Relief Program, or TARP. helped restore profitability, but within four heels of hurricanes Ivan, Jeanie, Francis years the market was to face a second and Charley the previous year, from which While insurers did suffer from the extreme major catastrophe. the insurance industry paid USD 25 billion financial market volatility following the in claims. collapse of Lehman, a more conservative Hurricane Katrina first made landfall investment strategy and lessons learned as a Category 1 hurricane in Florida on Hurricane landfall activity after 2008 from past stock market turmoil helped August 25, 2005; four days later it came abated until Sandy in 2012, but another them emerge from the crisis unscathed. ashore again, this time in , was brewing in the US and Euro- 70 miles southeast of New Orleans as a pean banking systems. US insurers also escaped the liquidity Category 4 storm. Katrina caused massive issues that paralyzed the banks since damage to New Orleans before Financial crisis insurance premiums are typically paid moving inland to wreak havoc across The financial crisis of 2007 and 2008 upfront and are not subject to the demands the southern US. started in the US subprime mortgage of policyholders, other than to pay claims. market and quickly spread to major banks Winds of up to 150 miles per hour followed in the US and Europe. With the collapse Overall losses by insurers were only one- by heavy rains overwhelmed New Orleans of investment bank Lehman Brothers in sixth of those suffered by the banking and the citizens who refused to follow September 2008 the crisis spilled over sector. Only a handful of insurers received evacuation orders. The storm and tidal into the broader economy, triggering the federal aid compared with 592 banks. surge overwhelmed the city’s flood most devastating recession in decades. defenses, killing 1,800 people and trig- Swiss Re refocuses gering massive losses in commercial and One of the most pronounced effects of Swiss Re, however, was not entirely private property as well as infrastructure. the crisis was the damage caused by shielded from the financial storm. Beyond trading in credit default swaps – credit the fall in share price and assets classes At the time, Hurricane Katrina was insurance that took the form of derivatives experienced by most other insurance the most expensive catastrophe ever re- contracts. The CDS market had grown players, Swiss Re reported losses related corded, with estimated total damages astronomically, with many banks and some to two credit default swaps. The company of USD 135 billion. It has since been insurers holding significant exposures. reported a CHF 11.4 billion reduction surpassed by the 2011 Japanese earth- in shareholder equity on investment losses quake which caused around USD 210 American International Group (AIG) was and a loss of CHF 864 million for 2008. billion in damages, although Katrina a major participant in the CDS market and remains the most expensive insured loss counterparty to Lehman. The bankruptcy at USD 74.7 billion. of Lehman threatened to drag AIG down with it, but a last-minute bailout saved AIG.

Swiss Re A History of US Insurance 51 1995 to present

Hurricanes test the foundations of insurability

Above: Extreme weather conditions such as hurricanes and tornados have made headlines over Just like the San Francisco earthquake As insurance and reinsurance capacity decades. 100 years before, there was uncertainty became constrained after the attack on over what was covered by insurance and the World Trade Center and again after Opposite: what was excluded. Hurricane Katrina Hurricane Katrina, Bermuda became an New Orleans after Hurricane Katrina, 2005. generated a swell of litigation, much of important domicile for startup companies it based on whether damage had been and new capacity entering the market caused by winds which are covered through so-called sidecar arrangements. The devastating run of hurricanes under standard homeowners insurance between 2004 and 2008 served as a policies or flooding, which is not. The increased cost and frequency of reminder of the nation’s vulnerability Atlantic hurricanes led many companies to the physical and economic ravages Besides the greater focus on analyzing to reassess their approach to weather- of weather. accumulated exposures, the hurricanes related catastrophes, implementing risk were a boon to the growing catastrophe reduction measures and purchasing Intense hurricane activity in the first dec- bond market, which enjoyed its best year greater levels of insurance. ade of the 21st century was unparalleled, ever in 2007, issuing some USD 8.5 billion raising serious questions over the effects of protection – much of it for US hurricane Reinsurers advocated for the continuation of climate change, the potential for even and earthquake perils. of risk-based pricing, which dictates greater losses from natural catastrophes that those who choose to build along hur- and their insurability. The insurance and reinsurance market ricane-exposed coastal areas pay higher in Bermuda also saw a spike in activity. premiums. Insured losses have also risen in propor- The charming little island in the Atlantic tion to the development of valuable prop- known previously as a vacation destination Hurricane Katrina also inspired more so- erty and population growth in hurricane- began to attract insurers and reinsurers of phisticated catastrophe modeling, which exposed states along the Gulf Coast. US risk in the liability crisis of the 1980s, was created in the wake of Hurricane and following Hurricane Andrew in 1992 Andrew. With each storm, catastrophe Hurricane Katrina reinforced some of the – when some of today’s mid-sized rein- modelers incorporated new learnings, lessons of September 11, reminding surers were founded, partially also with such as the potential damage from storm insurers and reinsurers of the importance Swiss Re investments. surge and the high likelihood of damage of identifying correlated losses and inland following a major hurricane. controlling their accumulated exposures.

52 Swiss Re A History of US Insurance Swiss Re A History of US Insurance 53 1995 to present

Despite these setbacks Swiss Re emerged It is also one of the most sophisticated While having undergone some reform in from the crisis as a leading reinsurer – markets – the source of most insurance recent years, the US tort system also a to the strength of its core reinsur- and risk management innovations of continues to pose an ongoing challenge ance business and solid client base. The the past 150 years. Events that affect to the insurance industry, as does the company benefited from a USD 3 billion the US reverberate around the world, potential for government and the courts investment by investor ’s with potential implications for the global to reinterpret established industry . The investment was economy, politics and trade – to name standards, as was the case following seen as a sign of confidence in Swiss Re a few. 9/11 or Hurricane Katrina. and its swift action during the crisis. The United States remains a challenging Over the years, the US has been something The company de-risked its investment market, characterized by its exposure to of an R&D lab for reinsurers, with its portfolio and refocused its business natural hazards, a complex state-based novel and unprecedented events, expo- on property/casualty reinsurance, life regulatory system and a tendency toward sures and risks. Likewise, the US insur- reinsurance and commercial insurance, litigation which favors the consumer at a ance sector has been instrumental to known as Corporate Solutions. The significant cost to businesses and insurers. the growth of Swiss Re and so Swiss Re financial services division was disbanded remains a vital participant in this market, and split into asset management and Throughout the history of the US market, standing with its clients to help ensure legacy business. foreign insurers and reinsurers have played their success and strength for years a crucial role in supporting US business to come. Swiss Re was reporting profits once again and society. The nation’s exposure to in 2009. In November 2010 the company natural hazards – including some of the repaid the Berkshire Hathaway in world’s largest potential hurricane and full and was able to move past the financial earthquake losses – requires the capacity crisis when Standard & Poor’s upgraded and expertise of global reinsurers like its financial strength ratings to AA-. Swiss Re.

Enduring legacy, lasting promise From the San Francisco earthquake of The US insurance market remains 1906 to Hurricane Katrina a century later, the largest and most influential in the reinsurers have helped the nation absorb world, reflecting the dominance of the shock of such disasters, facilitating the nation’s economy, its prosperity and economic recovery and prosperity. affluence, its dynamism and innovation, However, the threat of large-scale catas- and also its exposure to large-scale risk. trophes remains a major challenge for the US insurance market as an increasing number of people and development are attracted to hurricane- and earthquake- prone states. In addition, the specter of climate change further aggravates the risk by potentially increasing the frequency and severity of natural catastrophes.

54 Swiss Re A History of US Insurance The world financial crisis: Credit contagion

For the global banking sector, the finan- the United States and elsewhere experi- The Dodd-Frank Wall Street Reform cial crisis of 2008 was a catastrophe; for enced few issues besides the impact of and Consumer Protection Act brought the real economy it proved to be the most volatile investment markets. Even at that, sweeping reform of banking and estab- severe and dramatic decline since previous financial crises had taught the lished a Federal Insurance Office to the Great Depression. Insurers, however, importance of rebalancing their portfolios, collect data on insurers and recommend were better prepared. They were shielded which to a degree mitigated underwriting changes to state regulation of insurance. by measures taken after the burst of the losses. dotcom bubble, which had made their The increased regulatory scrutiny actually asset portfolios more resilient in the face Insurance regulation and industry practic- revealed strengths in the business models of stock market volatility. es require insurers to hold capital in excess of insurers. It showed that they pose little of their liabilities, often at a subsidiary or systemic threat to the financial markets, With a business model and regulation local level. The industry business model, nor are they exposed to the same liquidity that’s different from banks, insurers which sees premiums paid upfront in issues as the banks. In the spring of 2010 weathered the financial storm unleashed return for a promise to pay valid claims, the Insurance Information Institute noted by the subprime mortgage crisis and is not exposed to the same liquidity risk that “no P/C insurer failed because of the failure of Lehman Brothers in 2008. of banks. While a bank can face a run financial crisis (compared to more than on deposits, insurers in most cases cannot 200 bank failures to date), no claim went The crisis demonstrated that insurers return premium to policyholders. unpaid and no policy was cancelled.” aren’t exposed to the same liquidity issues as banks. Confidence in the insur- However, the crisis had implications for The Great Recession also reaffirmed ance business model was reinforced, insurers. It alerted policymakers and some of the fundamentals of reinsurance: but there were lessons for the sector – regulators around the world to the need to understand the underlying risks, to namely in regulation and risk management. for consistent regulatory standards and challenge models that suggest the future increased cooperation between supervi- will follow the past and to think the Insurers caught in the financial storm of sors. It also reinforced the need for more unthinkable. 2008 fell into two camps: financial guar- robust risk management and governance, antee insurers and those that had partici- reflected in insurance regulatory reform pated in banking-like activities such as in both Europe and the United States. credit default swaps and derivatives. However, the vast majority of insurers in

Above: The New York Stock Exchange.

Swiss Re A History of US Insurance 55 1995 to present

World Trade Center: The industry’s largest dispute

The destruction of the World Trade Cent- The dispute continued for two more years The disputes surrounding the WTC loss er sparked a coverage dispute that lasted as Silverstein and the insurers debated led to an insurance industry initiative to more than five years. The largest single the value of the buildings at the time of improve contract certainty, encouraged insurance dispute in history, it pitted their destruction. by regulators such as the UK’s Financial the buildings’ leaseholder Services Authority. against insurers. In fact, there were a In 2007, Swiss Re and six other insurers number of disputes, with differing results. reached a settlement that concluded the Insurers pledged that all wordings and dispute. Insurers were to pay USD 4.5 bil- terms must be agreed to before policy A commercial property as large as the lion toward the cost of rebuilding at the inception and that policy documentation World Trade Center requires many insurers World Trade Center site. must be issued within 30 days. and reinsurers to assume the risks and provide the large sums insured. Silverstein’s company leased the buildings in July 2001 and placed USD 3.5 billion of insurance for them with 22 insurers. However, when the terrorist attack happened, the contract wording for the had not yet been finalized and the insurers which were already on the risk used differing policy wordings, some of which provided more clarity than others.

Interpretation of the contract language with respect to whether the terrorist attack on the Twin Towers constituted a single insured event or two separate events would prove crucial to how much insurers would eventually pay.

Silverstein claimed that insurers owed USD 7 billion, although in 2004 two federal juries found that he was entitled to receive a maximum of USD 4.68 billion in insurance payments.

Led by Swiss Re, which had written a quarter of the USD 3.5 billion of insur- ance property cover for the World Trade Center, a group of insurers won their case when a New York jury confirmed the attack was one event and not two.

In separate trials a group of nine other insurers which had used varying policy language were found to owe double their policy limits.

Right: Ground Zero, September 13, 2001.

56 Swiss Re A History of US Insurance Mergers and acquisitions: Larger, but often still fragmented

In 2006 Swiss Re acquired GE Insurance Swiss Re played a role in the consolida- Solutions for USD 7.4 billion, the largest tion trend, completing 18 deals between reinsurance transaction in history. The 1990 and 2007 valued at a total of acquisition made Swiss Re the world’s USD 16.5 billion. largest and most diversified reinsurer at the time – adding clients and products Acquisitions have long played an important and reinforcing its leading position in the role in Swiss Re’s evolution. In the 1990s US market. It was one of the last mega- Swiss Re struck a number of deals, mostly acquisitions that shaped three decades acquiring life reinsurance companies of consolidation among the country’s in the US. Between 1995 and 2001 reinsurers and commercial insurers. it purchased four US life reinsurers, increasing its market share to over 25%. Today the US market remains relatively fragmented despite several periods In 1996 Swiss Re acquired Mercantile & of consolidation, most recently in the General for CHF 3.2 billion, a London- 1990s. based reinsurer with 80% of its business in life and health reinsurance, mostly in The late 1980s witnessed the start of America, the UK and Asia. Two years later a period of heightened mergers and it acquired Life Re, making Swiss Re acquisitions – a trend that would also see the largest life reinsurer in the United many mutual companies become stock States, followed by the acquisition of companies or succumb to acquisition. the reinsurance unit of Lincoln National, One of the largest US insurers, Travelers, further extending its market share. merged with Citicorp in a deal worth USD 72 billion in 1998. In 2001, American Swiss Re also made a number of acquisi- International Group purchased American tions to build its property/casualty and General Corp. for USD 23 billion. financial services businesses. In 1999 it acquired Fox-Pitt Kelton, which brought Foreign insurers were also part of the expertise at a time consolidation, as Germany’s when capital markets were converging acquired Fireman’s Fund and North with reinsurance. In the same year American Life and Casualty, and Zurich Swiss Re completed the purchase of Financial Services acquired Farmers Underwriters Re, a subsidiary of Allegha- Management Services, Universal Under- ny Corp., which also had a strong position writers Insurance Group and Kemper in alternative risk transfer products and Corp. the brokered reinsurance market.

The US reinsurance market underwent These acquisitions, including the purchase consolidation and became more global. of asset manager Corp in 2001, US reinsurers acquired European made Swiss Re a much more American companies while European companies company, both in its geographical foot- made purchases in the United States. print and diversification. Top: Early advertising of Employers Re which Between 1995 and 1998, some 50 later became GE Insurance Solutions and reinsurance deals were completed in the was eventually acquired by Swiss Re. United States, including ’s acquisition of American Re. Above: Swiss Re’s Manhattan office in the early 2000s.

Swiss Re A History of US Insurance 57 58 Swiss Re A History of US Insurance The value of reinsurance

Today, insurance is an integral their risks across the globe. Simi- to the economy, which helps part of our lives. Building a house, larly, its breadth of activity across drive growth and benefits society marketing a product, driving a lines of life and non-life business, in general. vehicle, all would be unthinkable let specialized insurers diversify without taking appropriate their risks over a wider range. And Reinsurance naturally researches insurance cover. through its long-standing client risks and the nature of risk more relationships, some dating back to than any other part of the financial By contrast, reinsurance remains the 19th century, a third dimension services industry. Knowledge virtually unknown by the general has opened up of distributing accumulated over centuries today public, even though it plays a key risk over extended periods of time. is harnessed in statistics and role in taking on risk and enabling state-of-the art models to better economic growth and progress. Reinsurers accept risks of virtually understand the risks of the 21st every kind, from natural catastro- century. This effort directly benefits Reinsurance is “insurance for insur- phes to higher mortality and clients and society as a whole. ers”. It carries out one of the fun- motor insurance to aviation liability. damental principles of insurance, These risks are transferred to them And reinsurers are also an active namely that risks need to be spread by the primary insurers, who then voice in the public discussion on as widely as possible. The more need to keep less risk capital tied risk. For addressing the big issues broadly they are shared, the more up and can write more business of our time and coping with natural cost effective it becomes to cover as a result. perils or epidemics, insuring large- them. scale projects and consumer As the premiums paid for reinsu- products, and, ultimately, insuring From the very beginning the rance are invested via the financial our everyday lives, reinsurance has reinsurance business was interna- markets, both primary insurers and become indispensable. tional, helping its clients offset reinsurers contribute significantly

Swiss Re A History of US Insurance 59 ©2013/2017 Swiss Re. All rights reserved. Title: A History of US Insurance Author: Swiss Re Corporate History Editing and realization: Swiss Re Corporate History Graphic design and production: Corporate & Logistics/ Media Production, Zurich Photographs: Swiss Re Company Archives bridgemanart.com (6, 8, 17, 20) SRCA (4–5, 16, 17, 18, 19, 22, 25, 26 right, 27 top and above, 28, 29) Insurance Library of Boston (8, 24, 31 middle left and right, 32–33, 34 right) Keystone (8, 51, 55, 58) Philipp Kester, published in: “Die Praktische Berlinerin” (19) Library of Congress (13, 20) wikimedia (21) Courtesy of the George Sutherland Archives, Utah Valley University Library (35) TIME Magazine (37 right) TIME Magazine, March 26, 1986 © 1986 Time Inc. Used under license. Time Magazine and Time Inc. are not affiliated with, and do not endorse products of, Licensee.  (2013) Mansutti Foundation (20) Visit www.swissre.com to download or to order additional copies of Swiss Re publications. Order no: 1505720_13_EN 10/17, 2000 en

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