INSURANCE AND REINSURANCE; A HISTORICAL CHRONOLOGY: Money Matters; World War II, Booming Economy and Growing Problems

Money matters

World War I was not insured, but its effects were deeply felt by the industry. 

This was not only through the enormous human tragedy the conflict had wrought. 

There was also a change in world and monetary politics. Free trade came to a halt and currencies began showing volatile moves. 

International insurers found themselves having to find ways to hedge against currency losses. 

Life insurers, especially in inflation-ridden countries such as Germany, were forced to recalculate their premiums. 

Insurance again became a national affair and almost all of the major exporters of insurance, among them Germany and the US, retreated from the global stage as trading with enemy states was ended. 

Only reinsurers were able to maintain their international presence and thereby helped to spread risks geographically. 

Yet, they too saw entire markets disappear with the revolutions in Russia and Mexico. 

Russia gradually shut off its market entirely, while the Mexican revolutionary war hurt the peso so much that doing business became unviable for insurers. 

Hyperinflation in Germany forced German companies out of the remaining foreign markets and entire classes of insurance collapsed as rates had to be adjusted weekly or even daily. 

Policies in foreign currency such as Swiss francs became popular until legislators ended this practice.

A woman burning German currency during the hyperinflation in Germany in the early 1920s. 

The hyperinflation meant that by 1923 the price of ordinary goods and food was billions of marks. The marks were literally not worth the paper they were printed on, and it was cheaper to burn them than buy fuel.

The Mexican peso had once been the model for other currencies including the Straits dollar and the Hong Kong dollar, as well as the Chinese yuan and the Japanese yen. Until 1920 the production of banknotes in Mexico lay in the hands of private banks such as the Banco Minero which issued this 5 peso note. 

The Mexican revolution which started in 1910 and lasted over ten years disrupted virtually all financial activities and devalued the peso to a degree that made it impossible for insurers to conduct business in the country.

Up until the October Revolution Russia had a large and well developed insurance industry which was very active on the global markets. Some Russian insurers kept on existing for a while in the US market after 1918 as so-called orphaned companies.

The Soviet Union nationalized insurance into the Gosstrakh which eventually was to become one of the world’s largest insurers in terms of premium income.

Government bonds were the preferred form of investment for many insurers and particularly reinsurers up until the recent financial crisis. They yielded predictable returns as opposed to volatile equities.

Reinsurers, especially, resorted to currency-congruent hedging by investing their premium income and reserves in the currency in which losses had to be paid. 

At least on the balance sheet this allowed the presentation of better results. And so, virtually overnight, reinsurers packed their economic research departments with scores of specialists employed to monitor exchange rates globally. 

The economic upturn during the 1920s only appeared to improve the situation. One of the few businesses to experience real growth was credit insurance, helped by governments who wanted to advance industrialization in their countries and promote exports. 

Reinsurers participated in establishing credit insurers such as the Société Française d’Assurances pour Favoriser le Credit which was founded in 1927 with help from Swiss Re. 

When Wall Street crashed in October 1929 it came as a surprise to many, including most foreign insurers active in the US market. Worse, it was not just one crash. It was a series of slumps with no clear prospect of a steady recovery. 

When the crisis spread to Europe, in 1931, European insurers active in the US market were doubly hit. 

The UK abandoned the gold standard and twenty-five countries followed its example, allowing protectionism and capital controls to take over. Trade agreements were now only made bilaterally and import quotas were fixed. Many insurers which had invested in foreign markets were severely hit and many went bankrupt. 

Some countries tightened up their supervisory laws and further reduced the market share of foreign insurers. 

If the San Francisco Earthquake of 1906 had taught the insurance industry that natural catastrophes could result in losses far beyond what had been calculated, inflation and the financial crisis forced it to recognize that monetary and financial upheavals could wreak even greater havoc.

American bankers and insurance managers in 1923.

Swiss Re’s loss card for the Titanic. Because the Titanic was considered unsinkable it had only been insured for half of its value and at a very low rate. Mainly British insurers were affected by the losses, which included some exceptionally high amounts for life insurances taken out by wealthy passengers, some of whom were among the richest people of their time. The Titanic’s sister ship Olympic could later only find insurance at a much higher rate.

Even though German insurers were banned from many foreign markets during World War 1, German reinsurers still had foreign risks in their portfolios. When the British ocean liner RMS Lusitania, at the time world’s biggest ship, was sunk by a German U-oat in 1915 a large part of the loss payments came from German reinsurers.

Risk management became increasingly important for insurers and better methods to manage accumulations were gradually developed. This cadastral map of Istanbul was used to indicate building materials and other factors that might influence or hinder the loss of insured objects. Such maps could also be used to monitor accumulations of insured risks.

World War II

What little remained of the insurance industry’s once global links was severed when World War II began. 

The actions of the Hitler regime led foreign investors to doubt the capacity of German insurance to fulfill its obligations towards foreign companies and to fear having their German assets seized by the state. 

The chauvinist wave that rolled across Europe and other parts of the world, if nowhere more than in Nazi Germany, expanded market shares by simply taking over state or trade-owned companies in occupied territories, while Jews and other minorities among policyholders were increasingly discriminated against and denied payments. 

The boom in Asian markets also came to an abrupt end. Shanghai had become the biggest marketplace in Asia. 

It was here that in 1919 American Asiatic Underwriters and Asia Life had been founded and where later, under the name of AIG, it would emerge as the world’s largest insurance company. 

With the attack on Pearl Harbor in 1941 foreign companies were finally driven out of Shanghai.

Global powers under the lead of the US and Britain started preparing the reconstruction of a functioning global system during the war, with the Atlantic Charter of 1941. 

In 1944, the 44 Allied nations drafted the postwar international financial and monetary order in Bretton Woods. 

For the insurance industry it was to have mixed results.

German propaganda for life insurance in the 1930s: “Life insurance is your brother in arms against fate”.

Germany had financed much of World War I through war bonds which eventually became worthless. In order to finance World War II the Regime forced banks and insurance companies to invest in government bonds.

Through this practice the regime had a vested interest in supporting life insurance.

Life insurers were in many cases investing substantially in war bonds a fact which they advertised heavily. A main concern was to curb inflation.

Booming economy and growing problems

As the war ended, it was not business which took over but politics. Endeavors to rebuild the economy required trade in raw materials. Insurance was a luxury. 

The Bretton Woods agreement had not accounted for the role insurance could play in the economy and generally neglected the service industries and intangible goods. 

This made business especially difficult for reinsurers who were active around the globe. 

Nations tended to regard reinsurance premiums paid to foreign companies as a net outflow of capital, leaving their countries with a negative capital account; the inflow of loss payments was duly ignored. 

Capital transfers became increasingly difficult and had to be negotiated with the respective clearing banks. 

Most insurers, however, were eventually given ample opportunities to grow in their home markets. Reinsurers such as Swiss Re tried to gain a foothold in the Commonwealth markets which continued to function across borders. 

But a large part of the world was closed for business, not least because of the spread of socialist and communist regimes and the tendency to nationalize reinsurance and even insurance operations in many countries.

A brochure of the Instituto Nacional de Reaseguros, the nationalized reinsurer in Argentina until 1992. From the 1920s on many countries started nationalizing reinsurance.

It was feared that the outflow of premium would have a negative effect on the countries’ capital accounts. Chile was one of the early countries to do so but other Latin American countries such as Argentina and Brazil soon followed.

Towards the middle of the century a large number of the world markets had semi or fully nationalized reinsurance.

Insurance eventually profited from the post war boom and many new markets were developed. But there was a shortage of insurance expertise to cater to all these markets. In 1960, Swiss Re established the Swiss Insurance Training Centre (SITC) to promote training of insurance experts especially from developing markets.

Motor insurance was one of the highest growth sectors in the post war period. During the war the use of private automobiles had been restricted and car insurance was accordingly low. The sudden upturn after the war was welcome but at the same time difficult to control.

Overall the business turned out to be technically negative and losses were often compensated for with growing premium income. For reinsurers the large portfolios of motor insurance caused additional problems especially with liabilities which took a long time to settle. Most of the losses were eventually offset with investment income.

Home markets also offered their share of problems. Hardly any sector illustrates this better than motor insurance. During the war, private use of automobiles had been restricted and the auto insurance branch was reduced to insignificance. 

The sudden recovery of demand after the war took most players by surprise. 

Compulsory liability insurance in most countries was what ultimately delivered exponential growth to the sector. To protect policyholders, many states encouraged tariff agreements to prevent self-destructive competition among insurers. 

But even with the agreed minimum tariffs to aid them, insurance companies only managed to keep up with technical losses by writing more new business. 

For reinsurers this challenge was compounded by the sheer size of their clients’ portfolios. Only the favorable conditions on the capital markets allowed severe losses to be offset with investment returns. 

Many reinsurers started fearing that reinsurance was about to come to an end and turn into a mere investment vehicle. 

From the 1960s on, Asian markets began having an impact on the global economy.

South Korea is a prime example. In 1962 a series of revolutionary reforms that also affected the insurance industry laid the grounds for what later would be dubbed a tiger economy averaging 8% growth per annum. 

Premium volume surged from USD 66,000 in 1963 to USD 1.5 billion by 1980. 

The government contributed enormously to the growth of the economy and it also played an important role in the expansion of the insurance market, by promoting the year 1977 as the year of insurance, for example. 

When the market was opened in 1980, foreign companies helped shift sector growth into overdrive; today the South Korean insurance market is among the top ten worldwide. 

But the global boom also ushered in new kinds of unknown and complex risks of far greater proportions. Atomic reactors, super-tankers, aircraft, and large building sites forced reinsurers to think about the limits of insurability. 

Liability issues also started making an appearance in American courtrooms. Some voices declared the reinsurance industry to be in a state of profound crisis. 

Proportionally sharing in the losses of a client was not an ideal solution to large risks. Excess loss contracts, long treated as a poor relation, resurfaced in the reinsurance world on the back of new actuarial developments in non-life. 

A new class of reinsurance managers, recruited from universities, began engineering the risks together with their clients, and gradually reinsurers developed a new identity as risk experts and insurers of near-last resort.

Singapore in the early 1960s with the Asia Insurance Building. When Singapore turned into a so-called tiger economy in the 1960s it could already look back on a long tradition of economic success. Swiss Re applied for a license in Singapore in 1967 which was officially approved in 1968. In 1975 Swiss Re opened its first representative office there. It became a branch office in 1997.

Seoul around 1900.

Seoul in 2013. Swiss Re wrote its first contract in Korea in 1965. The Swiss Re Korea Liaison Office opened in 1995. It was upgraded to a branch office in 2002.

One problem they could not resolve entirely was liability. Inflation and interest rates had already complicated the business of taking on normal risks, and liability cases took a long time to settle, exacerbating these factors. 

US courts began awarding higher sums in liability cases, thus adding what became known as super-imposed inflation to liability costs. Sound reserving became impossible. 

In the mid-1980s the situation went completely out of control, with asbestos, health and pollution-related claims, collectively dubbed APH, receiving record indemnifications. 

The so-called liability crisis hit almost every single insurance and reinsurance company active in the US market. 

Insurers were forced to refuse policies to all kinds of professions and businesses, including fire fighters and school teachers and municipal services. American insurance was cancelled, as TIME Magazine stated on one of its covers. 

The government reacted fast but not fast enough for the multitude of companies that went bankrupt. 

Many foreign insurers left the country or withdrew from writing further liability business. Some settled in Bermuda and helped this offshore location to grow to a key reinsurance center in the market. 

For large risks cover eventually became available from other, unexpected quarters.

Asbestos workers in Australia in 1927. The toxicity of asbestos was only gradually discovered and the first diagnosis of asbestosis was made in 1924 in the UK.

Cover image from TIME Magazine, March 24, 1986: TIME Magazine cover on the liability crisis.*

During the 1980s, liability insurance in the USA had become virtually impossible to write. Million dollar awards for compensatory and punitive damages had started appearing in American courtrooms in the early 1960s. By the 1980s, public services were about to shut down because they could not afford liability cover.

Yours truly

 

Emmanuel Sanyu Safali

The founder and host of

The Promise-Insurance Show on YouTube and TV

emma.safali@gmail.com

_{+256 752 187 255}