When the 21st century has passed, historians will look back on our time as the era of globalisation. The trend began in the last years of the 20th century, when first a handful of companies – media empires and soft-drink companies, for example – began treating the whole world as their market. By the end of the nineties we had named it globalisation. The world seemed to shrink.

Dennis Mahoney, chairman and chief executive officer of Aon Group, describes globalisation as a “fundamental business shift” to which the insurance industry must respond actively. “All businesses are becoming increasingly global, due to diminishing trade barriers through groupings such as North Atlantic Free Trade Agreement (Nafta), the European Union, and the Southern Common Market, Mercosur.”

He also believes that cyberspace reduces trade barriers, noting that in its first 30 days amazon.com sold books in all US states and another 45 countries. “Consumers expect global brands and services everywhere. They want the mobile phone that works anywhere in the world.”

Today about one-fifth of the world's output is open to global competition in products, ownership, and services. Mahoney, citing McKinsey research, projects that within 30 years the total will have increased considerably: four-fifths of global enterprise will be the work of international players. “Access to global markets means millions of consumers become billions of consumers. As companies grow into those markets, their appetite for risk increases.”

He adds that ever-larger companies will retain more risk on their own account, reducing their need for conventional, insurance-based risk transfer.

BP is a prime example – globalised to the point that the B no longer stands for British. The fuels giant has, over the past several years, eschewed the purchase of insurance, except in special circumstances. Even then, it prefers to buy from its captive vehicle, Tanker Insurance.

It leaves Mahoney and his sector needing to re-evaluate their roles. “We are not there selling products any more,” he said in a recent presentation in London. “That means a dramatic change for us as intermediaries. Global clients want comprehensive solutions, and worldwide access to capital markets.” In other words, to survive in the global age, intermediaries must reinvent themselves. “We must understand our clients' businesses, develop customised solutions, and help them manage the upside, not just the downside. We need to help them understand the threats to their earnings, not just their assets.”

As insurance buyers globalise, insurance providers must go global as well. Yet despite consolidation in the broking, underwriting, and reinsurance sectors,

the industry has lagged behind in the globalisation process. “We had to not only catch up with our clients, but to go out and get ahead of them,” Mahoney admits. Fragmentation remains in almost every market, with new global players sharing the pie with dozens or even hundreds of smaller local competitors.

Finding their feet

In personal lines, businesses are jockeying for positions as if the world were a giant game of Risk. But Bob Scott, chief executive of UK market leader CGNU, Europe's fifth-largest insurance group, says insurers have a way to go.

“Despite the consolidation that has been going on, of the major industry groupings, financial services is one of the least consolidated,” he said. “Think food, autos, retail – most have consolidated more.” He says there is “a long way to go yet before we end up with the final shape of financial services.”

Scott predicts that consolidation will continue at a rapid rate, and that “out of it will emerge ten, maybe 15 industry shapers, including the convergence of banking and insurance”. Global significance, he says, requires dominance in the domestic market, something he has achieved after two major mergers for CGNU. From that platform a so-called national champion can begin the conversion to global giant. Although the conduct of local insurance business anywhere is dependent on local culture and custom, some insurers, through acquisition and expansion, have been able to smash through international boundaries to bring globalisation to the world of insurance.

Part of CGNU's strategy is to have broad distribution and flexibility, with the awareness that different clients, in different countries, buy insurance in different ways. “Ten years ago in the UK the direct sales force was the way to go. Now it is independent financial advisers,” Scott says, but he points out things are much different elsewhere. “In Germany, distribution is dominated by direct sales forces, as is the case in Italy. In France, bancassurance controls 60% of new business in the life sector.”

Scott likes to speak of a European super-league of insurers. It includes Axa of France, Allianz of Germany, Generali of Italy, CGNU of Great Britain, and Zurich Financial Services of Switzerland. With the powerful base of home-market dominance to build on, each company has constructed a global insurance business for the post-national world.

Globalisation demands a rethink of corporate identity. Norwich Union (NU) will remain the leading non-life brand for CGNU, but it has had to amend the NU's familiar steeple logo – the steeple is now simply a spike. A spokesman explained that a rural English cathedral is an unsuitable mark for an international business that hopes to attract customers from many different religious backgrounds.

One nation

Similarly, few in the UK would think of Germany when buying from Cornhill, of France when buying from Sun Life, Switzerland when dealing with Churchill, or Japan when calling Hastings Direct. That these companies are not British does not matter.

Britain's second major global player is Royal & Sunalliance which, following the merger of its eponymous predecessors, has expanded its global presence through significant acquisitions in the US and Scandinavia. Chief executive Bob Mendelsohn says globalisation drives excellence. “The industry is facing unprecedented change. If we are going to survive, we have to become the champions of business,” he told the annual conference of the Chartered Insurance Institute (CII) in September. “Ours will be a truly international business. We cannot set our standard to be the best in the UK, or even the best in our region, because there is a global standard.”

Mendelsohn says: “The one underlying truth about the electronic age is that customers will demand the best products and services available anywhere in the world, even when local customers do business with local insurers.”

As with the globalising corporations that Mahoney noted are willing to retain more risk, the international insurers of the super-league are able to hold somewhat more of the risk they assume on their own account, which has the effect of squeezing the business available to reinsurance markets.

However, reinsurers have been busy with their own wave of consolidation and globalisation. Following mergers such as that of Munich Re and American Re, General Re and Cologne Re, and Swiss Re and M&G Re, the top ten reinsurance groups control nearly half the world's reinsurance business. The remainder is divided between scores of smaller players in the market.

Meanwhile the effect of the global-isation of the largest reinsurance brokers (who, having acquired offices in every quarter of the globe wish to utilise them) has been a move to localise international insurance business. It may appear a contradiction, but globalisation has increased local activity. The Asian office of a global insurer may seek reinsurance protection through the local office of a global broker, who places the business with local underwriters holding the pen of an international reinsurer. Likewise, insurance buyers – who have usually tended to obtain cover locally – are in a similar local-global loop. One result of these trends has been to reduce the importance of London and other insurance centres to a degree. But, arguably, London is simply another local market, albeit one that specialises in the most complex and largest risks. Almost all of London's underwriting capital is provided by a global company located elsewhere.

European super-league

The final shape of the global market is not clear, but it seems certain that in the medium-term the European super-league will gain in strength, both at home and abroad. This should benefit customers with more product choice as multi-nationals import and export products from market to market, better products as the ability to compare improves, lower costs as enormous operations yield efficiencies, generating savings and better returns from massive portfolios of funds under management.

The danger of oligopoly is tempered by continued low entry barriers to the insurance business. This should ensure that, if the big insurers begin making too much money, new players will come along to share in the spoils. However, a global market could bring on a flatter insurance cycle, and thus steadier prices and profitability for insurers over years. “Past volatility in the UK market has largely been driven by erratic behaviour,” says CGNU's Scott. “The big difference now is that the top five companies have about 60% of the market, and all of them are certainly saying the same thing: “We just can't go on with these thumping great underwriting losses.”