New York — The push by Middle Eastern and Asian countries to build diversified financial centers over the next several years could have profound implications for the insurance industry.

A new report from New York-based Deloitte Research, “Insurance Firms: The Missing Link in the Sovereign Wealth Fund Acquisition Spree,” contends that acquiring insurance companies would make strategic sense for sovereign wealth funds (SWF) after their recent activity elsewhere in the financial services sector.

“If you consider their acquisition of banks, brokers and asset management companies, it looks like there is a plan,” Joe Guastella, principal global insurance leader, Deloitte Consulting LLP, tells Insurance Networking News. Guastella says these investments promise not just a financial return but serve a strategic purpose by helping the investors gain access to intellectual property and learn best practices that may not be prevalent in places with nascent financial services sectors. “There is a big gap right in people skills and the underlying technologies that really needs to be filled,” he says.

While companies often buy technology rather than build it in house, SWFs may see investments in North American and European insurance companies as a quick way to build their operations. Yet, Guastella notes that the SWFs often prefer partnerships and equity stakes to mergers and acquisitions. “It’s not buying outright, but taking a stake and doing things jointly in order to learn,” Guastella says.

For insurers, SWFs provide the possibility of a large-scale capital infusions with few strings attached. Moreover, a link up with a SWF may help ease entry into new markets. “For insurers trying to get into those [emerging] markets in a bigger way, these type of deals could be a differentiator,” he says. 

While SWFs are most readily associated with oil-rich states such as Abu Dhabi and Dubai, China’s SWF, China Investment Corp. (CIC), also employs a strategic approach to investing. In 2007, the CIC injected $20 billion into the state-owned China Development Bank to help recapitalize it.

The Deloitte report notes that Yang Chao, chairman of China Life Insurance, China’s largest insurance company, indicated he plans to buy a “strategic stake” in a large insurance company in Europe or North America, and that it is “not beyond the realm of possibilities that the CIC will help pay for this acquisition.”

Guastella says the Chinese approach will likely differ from those based in the Persian Gulf. “It’s going to play out differently for the Middle East and China,” he says.  “I can see more of a Bermuda-type reinsurance market growing in the Middle East. If you look at China, it’s more of a need for the skills and technology to do personal lines.”

Source: Deloitte Research

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