Consolidation of reinsurance firms may be a ‘natural outcome’ of the changing reinsurance market environment, as new inflows of alternative capital alongside high levels of traditional reinsurance capital boost competition, according to EY.
In its latest outlook for the Eurozone financial sector, EY addresses the challenges that are facing reinsurance firms in Europe, which are the same as those affecting reinsurers operating throughout the rest of the world. Excess capital and capacity, alongside low levels of catastrophe losses, have created an environment which is growing increasingly conducive for consolidation.
EY notes that reinsurers are facing rising competition from inflows of third-party or alternative and ILS capital. These inflows are leading to overcapacity in the reinsurance sector, particularly when the sector is awash with traditional capital anyway.
One result of all this excess capacity in the reinsurance market is that demand is becoming increasingly price sensitive, resulting in the pressure on prices and softening rates, while also leading reinsurers to expand coverage and offer more relaxed coverage terms.
Traditional reinsurers are responding, notes EY’s EMEIA Insurance Leader Andreas Freiling, by seeking to strengthen their customer relationships, while also looking to boost the return they make from the asset side of their businesses, to compensate for reduced underwriting profitability.
Despite these responses being made by reinsurers, it seems that EY feels that it may not be enough to prevent mergers and acquisitions becoming an increasingly attractive route to take.
“Industry consolidation may be a natural outcome of this new environment,” writes Freiling, suggesting that no matter what actions reinsurers undertake in an attempt to ward off the effects of high competition from traditional competitors and lower cost capital and softening prices, for some the consolidation or M&A option might be the only viable route forward.