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Global financial giants are stretching the concept of insurance to new limits. It used to be easy: for a fee, a company with a big balance sheet would take the risk of fire, flood, and theft losses off its clients' books and onto its own. But times have changed. Now companies face much more complicated risks, and insurers are evolving to handle them.

"We are geared towards the delivery of insurance as a capital management instrument," says Erwin Zimmermann, Chief Executive of Swiss Re New Markets, a Division of Swiss Reinsurance Company. "We say insurance is a capital management business, and that the people who have to manage their capital structure, their cost of capital, and their return on capital can profit from dealing with us. The product, by and large, is still risk transfer, but it is enhanced by financial structuring techniques. That is our offering."

The structure of deals insurers such as Swiss Re are now executing is limited only by the imagination. In one transaction this year, Swiss Re New Markets agreed to purchase up to C$200 million worth of preference shares of Royal Bank of Canada, but only if the bank suffers extraordinary losses in its loan portfolio. The result: without impacting its balance sheet, the bank has secured a guaranteed influx of new equity in a potential time of crisis.

In a different type of deal altogether, Swiss Re backed the securitization of franchise income for a fast food restaurant franchiser. Triarc, owner of the Arby's brand, issued $290 million in bonds guaranteed by the flow of future income related to the brand. The security is an insurance policy backed by Swiss Re.

"We identify clients from the Fortune 500, and try to develop a franchise-type relationship with them by understanding how their issues relate to their strategy, their investor base, and their rating and regulation environment," Zimmermann says. "Then we custom tailor approaches that address their risk and capital management needs."

New insurance approaches like the Royal Bank's deal are reaching to the protection of the balance sheet itself. Mark Starr, an underwriter in Swiss Re's London office, explains the use of "hybrid insurance-type covers" to protect financial exposures, through what he describes as "integrated risk cover."

Weather insurance
Today even the weather is insurable. Corney & Barrow, the trendy London wine bar chain, last year cut a deal with Enron, the troubled energy trading company, to hedge its weather risks. C&B collected £15,000 for each Thursday and Friday when the temperature remained below 24 degrees Celsius. Fortunately for Enron, the deal was capped at £100,000, although a C&B spokesman said they would have rather had the sunshine than the payout. Insurers are watching such deals with interest--and caution. For years they have been offering insurance quaintly dubbed pluvius, essentially insurance against rain delays and cancellations for event organizers. But the emerging market in weather derivatives, and even such potential trading markets as greenhouse gas credits under the Kyoto Agreement, look attractive to the insurance sector, which knows the weather, has superior capitalization, and is expert at managing risk.

However, so far that interest has translated into little action. When they have played in big weather derivatives deals, insurers--those that played counterparty to UK utility Centrica in a weather derivatives arrangement in the late 1990s, for example--have counted the cost. Still, proponents are upbeat. "The market has huge potential," says Europe's only full-time weather derivatives trader, Nick Ward, Head of the Weather Desk at Spectron Group. "Seventy to 80% of companies have quantifiable exposure to the weather."

Global clients, global insurers
As the boundaries of what is insurable begin to melt away, so do the regional borders between nations and even continents. Globalization has meant that companies want insurance products that cover them anywhere their business might take them, and globalising insurers have responded.

Allianz, which flexed its muscle to acquire Dresdner Bank, Germany's number three, in April, is a prime example. It has established an international property insurance program that provides international clients with local insurance policies and services in accordance with local law and market requirements, but with harmonized coverage limits worldwide, single contact points, and wide coverage. The promise is delivered though the insurer's network of 700 subsidiaries in more than 70 countries.

Alongside the evolution of insurers has been a parallel Globalization of insurance brokers. Until the early 1990s a relatively fragmented sector, brokers have undergone a far-reaching wave of consolidation. The business is now dominated by global giants, with far-reaching capacity. Aon, Marsh, and Willis, the big three, have evolved from transactional intermediaries in basic risk transfer to become key players in the global management consulting business, assisting leading corporations in the identification, assessment, management, and transfer of business-critical risks.

"Aon has grown its business rapidly in recent years to become more than simply an insurance broker," says Sebastian St John-Clarke from Chicago-based Aon's European headquarters in London. "Clients are increasingly looking for more creative and imaginative ways of mitigating and transferring their risks, and we have evolved to offer levels of risk management expertise that far exceed what many see as the traditional role of a broker."

Global distribution is key, St John-Clarke says. "Aon has concentrated on developing a global infrastructure of resources ensuring efficient delivery of integrated risk management, insurance brokerage, reinsurance, and human capital consulting services." Just what the chief financial officer ordered.

Land of Giants
European insurance has become a land of giants. "Allianz will exit the expatriate healthcare business if our goal of reaching the top five cannot be achieved in five years," said Dr Gerhard Rupprecht, a board member of Europe's largest insurer, Allianz.

The occasion was the launch of its innovative Dublin-based, global health insurance operation for expatriate workers. "We do not want to be in businesses where we do not have a top position."

Rupprecht's comments sum up the key aspects of the European insurance market of the 21st century. First, scale is paramount. The leaders--companies such as Allianz, Axa, Generali, and CGNU--want to be in the top rank of any market, by geography and line of business, or they don't want to be there at all. These massive players have become the European Super League, so named by Bob Scott, the insurance man who merged the UK's General Accident with Commercial Union and the Norwich Union to form CGNU, one of the world's largest insurers. They have no time for minor league plays.

Second, home-market boundaries have melted away. Practical challenges (language and custom, for starters) mean that the European Union is for insurers a single market in name only. In practice, a discrete operation is required for each country in Europe, and elsewhere in the world. But those companies that have gained dominance in their home markets have sought to do the same in neighboring countries.

Yet the reality that Europe still comprises multiple states that need special attention has not stopped companies from taking advantage of the Union where possible: home-state supervision of insurers means, for example, that Allianz can set up the risk-carrying subsidiary of its new health care operation in low tax, insurer-friendly Dublin, and sell the product through its culture-conscious operations elsewhere.

Third, Europe's leaders have looked abroad with gusto. Royal & SunAlliance is a leader in Korea. Allianz has been licensed in China. India's newly-liberalized market has attracted leading Scottish players. Spain's leader, Mapfre, has massive interests in South America. The US has also been a fertile ground for European insurance capital. Companies such as ING, Fortis, and Aegon of the Netherlands have successfully snapped-up some of the most attractive life insurers across the Atlantic.

The mere fact that Allianz is in health insurance at all is a sign of the times. Almost en masse, some European insurers are walking away from the non-life insurance business--cars, houses, factories, and the like--and are moving into financial products such as life and health insurance and pensions. The volatility of non-life business doesn't fit well with the long horizons of life lines, so many companies, notably Scandinavian and UK insurers, have exited or are de-emphasising non-life business.

Some see the future in asset management, and especially in pensions, as Europe looks at overhauling the way it deals with retirement provision. Insurers are developing new savings instruments to cope. "In Germany, pension reform continues to fuel a shift in the insurance product mix," said a spokesman for Axa, Europe's second-largest insurer. "In the first quarter [of 2001] our unit linked premium sales grew 45%, while non-unit linked premiums fell 7%."

Even more potential lies in government-sanctioned pension schemes. Insurers are queuing up to participate. "With the pension reform, another legal form [of pension fund] will be developed as a capital catchment basin, in addition to life insurance companies, investment companies, and banks," declares Volker Weisbrodt, a member of the board of German insurer Gerling Global. "New business premiums will be redirected into pension funds, and, as a consequence, insurers will write less life insurance."

Of course other insurers, such as Allianz and Royal & SunAlliance, seem to possess an insatiable desire for non-life insurance risk. In the wake of the attacks of 11 September, which represent the largest single loss event in insurance history, they are in a better position than ever. After years of losses which have driven some insurers to the brink of bankruptcy, the omnipresent insurance market pricing cycle is making a turn in favour of insurers. The effect was emphasized by the tragedy, and those that remain in the property insurance game look set to benefit.