Industry consolidation in the reinsurance market is expected to continue, especially as companies focus on client value and ramp up efforts to cut operational costs, diversify both geographically and by product, and increase market share. But consolidation does not come without challenges.
Merger and acquisition (M&A) activity over the last 15 months have been widespread, according to “Insurance and Reinsurance Market Conditions Set the Scene for Further Takeover Activity,” a special report from A.M. Best, a global credit rating agency with a unique focus on the insurance industry. The report says reinsurers increasingly are looking for ways to “deploy capital and create scale against a backdrop of ongoing soft market conditions and weak investment returns,” and that consolidation offers create opportunities to provide value to clients.
As an example, many major brokers are hoping M&A activity will allow them to exploit collected data and analytical tools to realize efficiencies and supplement commission payments. The $18 billion merger between Willis Group and Towers Watson is an example of brokers developing their analytical operations to offer added value to clients and illustrates the growing importance of data mining and analysis, according to A.M. Best. Insurance Networking News covered the deal, and Towers Watson hopes to jump-start distribution of its technology services, including private health insurance exchanges and analytics, in the merger.
Reinsurers engaged in M&A activity do encounter challenges, however. The A.M. Best report points to execution risks, especially related to operations’ consolidation that is necessary to realize efficiencies. This includes integration of core IT systems, systems consolidation, talent acquisition and modernization.
According to A.M. Best, M&A success includes “a strategic fit between the companies, solid business rationales and cultural compatibility.”
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