Investing in insurance and reinsurance for access to premium float liquidity is clearly rising in popularity, with the latest conglomerate reported to be seeking acquisitions being Shanghai development firm Future Land Development Holdings Ltd.
Bloomberg reports that the Chinese development firm is seeking out investments in the insurance or banking space, as the firm looks for ways to access capital to help fund its development work.
Chairman of Future Land Wang Zhenhua told Bloomberg that the firm is studying investments in “insurance companies, banks and the like.”
What’s interesting is why Future Land is doing so. Seemingly it’s for the access to insurance or reinsurance premium float.
“Liquidity from an insurance company can complement any cash-flow shortages or needs in the property business,” Wang Zhenua explained.
The increasing interest in insurance and reinsurance from large and diversified conglomerates, or hedge fund investors, or global corporations with many strings to their bows, could result in additional competitors with different priorities to incumbents.
The attraction to regular cash-flows from insurance or reinsurance premium income, with the ability to put this capital to work across other diverse business areas, is what has attracted these large Chinese conglomerates to the re/insurance sector.
Premium float is seen as a good way to offset shortages of capital, providing investable assets which can be utilised in projects, such as development, while the diversification across sectors in large Chinese conglomerates allows claims to be managed and paid.
Of course this is the Warren Buffett model at Berkshire Hathaway. It is also akin to the model followed by hedge fund strategy reinsurance firms, or investment oriented insurers and reinsurers.
As this model gains in popularity and companies increasingly seek to put insurance premium income to work, rather than simply investing it safely as is the strategy of traditional insurers and reinsurers, it could place additional pressure on the market.
The differing priorities, of safely investing premium income for a very low return at traditional re/insurers, vs making more use of premium income and relying on diversification or matching of assets to expected liabilities at investment oriented firms, may open a new gulf in the market.
If insurance and reinsurance companies operated by large conglomerates can apply a different cost to their capital, as they can put it to work more productively, it could enable them to become more efficient.
Ultimately, they could offset some of the premiums they charge to customers due to their ability to make more return on the investment, or within other sectors of their businesses. That could result in these new entrants being more competitive in the marketplace, which could add unwelcome additional pressure and perhaps also soften the cycle further.
Of course, whether new conglomerate type insurance and reinsurance company owners, like China’s Future Land, make waves, or simply seek to leverage the premium float quietly while letting established market forces continue to drive the economics, it is more well-financed competition.
Right now more competition would not be welcomed by the traditional market stalwarts. However it is demonstrating the ongoing attractiveness of the market and also, perhaps, giving other large established re/insurers ideas.