Growing populations, urbanization, and industrialization led to surging insurance needs in Europe in the 19th century. To meet this need, hundreds of new insurance companies were formed across the continent. However, these same trends also made insurance a riskier business. The growth meant that a factory or town burning down in 1860 could be a far more expensive disaster than a similar accident in 1800. As a result, the need for reinsurance grew. A particularly expensive fire, in the Swiss town of Glarus, led, albeit indirectly, to the creation of a new reinsurance company, Swiss Re.

Glarus

            Glarus, in the Swiss canton by the same name, was devastated by a fire on May 10 and May 11, 1861. About 600 buildings were destroyed, contributing to losses of more than eight million Swiss francs. By comparison, the canton’s own compulsory fire insurance program had kept just 250,000 francs in reserves. Besides these public fire insurance programs, there was only one dedicated private fire insurer in the entire country. Thus, a lot of the losses had to be borne by taxpayers and the fire starkly demonstrated that there was a lack of insurance capacity in the country.

Glarus after the fire in 1861, Source: ‘A History of Insurance – Swiss Re 150 Years’, pg. 22 (Pamphlet)

Risk and Reinsurance

            A logical reaction to the problem was to establish a new fire insurance company to insure more properties. In St. Gallen, Moritz Ignaz Grossmann created a new fire insurance company, a spinoff of the existing insurer Helvetia General. This is the most direct insurance legacy of the Glarus fire but the disaster also did make the case for greater use of reinsurance. So, Grossmann also proposed the creation of a Swiss reinsurance company.

            Such firms had been created before in France, Germany, and Hungary. Indeed, Helvetia was already using their services. The earliest reinsurance contracts dated to the early 19th century. They emerged first on a one-off basis, what is called ‘facultative reinsurance’, in Britain in the first decade of the century and later a form of more programmatic reinsurance, called ‘treaty reinsurance’, developed in the 1820s in continental Europe.

            The need for reinsurance emerged with the increasing complexity and potential risk of property and casualty insurance. Industrialization and urbanization introduced new assets to insure, like factories, steamships, and railways but also meant insurance risk was becoming more concentrated in fewer more valuable assets.

           Switzerland was experiencing these trends to considerable degree in the middle of the century. The populations of Basel and Geneva grew between 30% and 40% in the 1850s alone. The number of cotton spindles in operation doubled between 1843 and 1861. Most dramatically, an investment boom meant the length of railways in Switzerland increased from just twenty-five kilometers in 1850 to over one thousand kilometers by 1860. Across Europe, the number of insurance companies was growing rapidly; whereas there were just thirty in business across eight countries in 1800, there were 306 companies across fourteen countries by 1850. A reinsurance company could spread risk around, reducing the potential loss of any one firm, by taking on a more diverse portfolio of risks ceded by individual insurers.

Swiss Re

            Moritz Ignaz Grossmann was particularly interested in forming an independent reinsurance firm, rather than a captive reinsurance arm of a larger existing direct insurer, because an independent firm could build a more diverse portfolio of risks, serving different clients in different business lines in different countries. This diversification would reduce risk and allow the firm to grow more quickly. Grossmann also wanted to keep insurance premiums in Switzerland rather than reinsure risks with foreign insurance companies. To this end, Schweizerische Rückversicherungs-Gesellschaft, or ‘Swiss Re’, opened for business on December 19, 1863. Its first office was a small apartment on the first floor of Schoffelgasse 1 in Zurich. Grossmann would play a large role in the very early history of Swiss Re.

Early History

            Swiss Re was founded with six million Swiss francs of capital, split across 3,000 shares of 2,000 francs each; of this amount, 15% was paid in up front. The money was raised from an investor group that included two banks, Schweizerische Kreditanstalt (Credit Suisse) and Basler Handelsbank. Swiss Re’s first marine reinsurance treaty was signed with Helvetia General on January 1, 1864. Helvetia General was also an investor in Swiss Re; together with the two bank investors, the group owned 2,500 of the 3,000 shares.

           In any case, Switzerland being a landlocked country, there were only limited local opportunities for marine insurance. Swiss Re’s first fire reinsurance treaty was signed on May 1, 1864 with Grossmann’s Helvetia Fire. This quickly overtook marine insurance in importance. Swiss Re provided 202 million francs in coverage against fire and already in 1864, a dividend of 5% was paid on the shares.

            In 1865, Swiss Re moved into a larger office at Stadelhoferplatz 12 in Zurich. Grossmann selected Giuseppe Besso to be Swiss Re’s general manager starting from 1865. Besso belonged to a prominent Italian insurance family; his brother was director of Asscuriazoni Generali. Besso prioritized diversifying Swiss Re’s early book of business by geography. Business was conducted with firms in Germany, Italy, France, Austria, England, Belgium and Russia. Indeed, while Grossmann envisioned a reinsurance company for Switzerland, only two of the firm’s earliest 18 contracts were with Swiss clients.

Early Trouble

            Swiss Re had a dismal start. Hot dry summers in Europe caused elevated fire-related losses in the mid-to-late 1860s. Just a sample of those affecting Swiss Re were the destruction of nearly the entire town of Bragernaes in Norway in 1866 and several French factory fires and granary and warehouse fires in several German cities in 1868. New types of property, like certain types of factories, were riskier yet challenging to properly underwrite. Denser cities also posed greater risk to insurers since damages from fire could be far greater.

            In response to these losses, the company decided to scale back its business. Equity capital was reduced from six million to four-and-a-half million francs in 1869 by the repurchase of 750 shares at a 10% discount to the selling shareholders. Accordingly, less new business was underwritten in 1869. Other early reinsurers, like Cologne Re, were also struggling at this time amidst large losses and many were predicting reinsurance firms’ demise.

Growth

            Giuseppe Besso remained Swiss Re’s general manager until 1879. He spent the late 1860s cancelling some contracts and renegotiating others to improve pricing and other terms, like the notice Swiss Re must give to cancel a policy. It also began to reinsure itself; the obtaining of reinsurance for reinsurance companies is known as retrocession. In 1875, Swiss Re even created its own retrocession subsidiary, Prudentia. Swiss Re even considered exiting fire insurance altogether. Nonetheless, business improved in the 1870s and Swiss Re’s capital recovered slowly but steadily from here. Still, the slightly improved conditions meant competition increased, both from new reinsurance companies and traditional insurers moving into reinsurance.

            Bess was succeeded by Wilhelm Wasels in 1879 and therafter Swiss Re expanded into new product lines. An accident and health policy was underwritten for Cologne Accident in 1881 and motor reinsurance and engineering reinsurance coverage was added to the product portfolio in 1901 and 1903 respectively. In 1890, Swiss Re began to transition towards the modern role of a reinsurance company by underwriting ‘excess of loss’ contracts. Under these agreements, the reinsurer only covered losses beyond a certain threshold, rather than taking a share of all the insurance client’s losses.

            Early in the new century, Swiss Re experienced its largest loss in history with the 1906 San Francisco Earthquake. The earthquake and subsequent fire destroyed much of the city as 25,000 houses were destroyed leaving a quarter million homeless. Swiss Re’s losses in the disaster came to 4.3 million Swiss francs at a time when the company had equity capital of just 9.9 million francs. Swiss Re was nonetheless able to honor its contracts. In the aftermath of the disaster, Swiss Re played a role in clarifying insurance contract language for fires caused by earthquakes. More immediately important, the company benefited from an enhanced reputation among American and British insurers. A U.S. branch of the firm opened in 1910.

Lesson

             Natural disasters and fires often set the rhythm of the insurance industry. They are to insurance what financial crises are to banking or investments. Even the founding of new firms tends to be tied to these disasters. Perhaps the first fire insurance company was founded in London in 1680, to a large extent as a result of the Great Fire of 1666. Similarly, the 1842 Great Fire of Hamburg led to the creation of Cologne Re. After the 1835 Great Fire of New York, many new companies were founded in the following few years. These new firms rush in to profit off the shortage of insurance capital and gradually restore the industry’s health, until the next disaster starts the cycle anew. A few firms, of which Swiss Re is just one, survive a multitude of these crises and keep the industry afloat in years of limited insurance capital.

Further Reading

1.      Borscheid, Peter, et al. The Value of Risk – Swiss Re and the History of Reinsurance. Edited by Harold James, Oxford University Press, 2013.

2.      A History of Insurance – Swiss Re 150 Years, Swiss Re, Zurich, 2013.

3.      “Our History.” www.Swissre.Com, Swiss Re Group. Accessed 25 Feb. 2024.

4.      Pearson, Robin. “The birth pains of a global reinsurer: Swiss re of Zürich, 1864–79.” Financial History Review, vol. 8, no. 01, Apr. 2001, pp. 27–47.

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