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Inflow of non-traditional reinsurance capital may stimulate M&A: Deloitte


The continuing inflow of non-traditional capital into the reinsurance market from capital market and institutional investor sources could result in a renewed interest in mergers & acquisitions, according to a report from professional services firm Deloitte.

Deloitte’s report on the property and casualty insurance sector explains that one impact of the alternative reinsurance capital inflow is that commercial property insurers have found that rate increases have been restrained by excess capacity in the market.

With capital market players and institutional investors seeking diversifying and low correlating returns from the reinsurance-linked asset class and instruments such as catastrophe bonds or insurance-linked securities (ILS), capital has been pouring into the reinsurance business, said Deloitte.

This additional capacity, on top of a well-capitalised traditional reinsurance market, has increased competition and undermined the reinsurance markets ability to raise, or even maintain, rates. Deloitte says that consolidation may be one solution which could help to drain some excess capacity from the market, perhaps even overcoming the headwinds that have beset insurer M&A in the last few years.

Deloitte suggests that the impact of the share buyback strategy may be playing itself out, perhaps resulting in a renewed focus on mergers & acquisitions as a way to boost share value. The influx of capital has created excess capacity, undermined pricing and inhibited organic growth, said Deloitte, which may rejuvenate the tepid M&A environment.

Reinsurance may be the first area which is ripe for M&A activity, explained Deloitte, particularly if capital market investors and alternative capital maintains its interest in the space after a series of major catastrophes. M&A might allow reinsurers to acquire new scale, boost shareholder returns and grow their influence at renewals time, all of which may currently look very attractive to any under-pressure reinsurance firms.

Deloitte is almost certainly correct that mergers and acquisition will be a more tempting prospect for insurance and reinsurance firms who feel the pressure from declining prices and a well-capitalised, more competitive market environment. Mergers may prove more attractive than acquisitions, as joining forces to create a larger capital base and market footprint looks a good strategy for some.

M&A is not the only route for a beleaguered insurer or reinsurer to take, however, as Artemis has explained before the insurance and reinsurance sector is not just facing a wave of consolidation, in the wake of alternative capital influx, its other option is to adapt its business model.

Here, the other focus of Deloitte’s report is particularly relevant, innovation. Deloitte says that innovation may be the new normal for insurers seeking growth. This is also true for reinsurance firms, the coming years are set to be a period of innovation in markets which have for years seemed set in their ways.

Capital, especially from alternative and capital market investor sources, is one factor driving this innovation. Another is the need to find new growth opportunities, pushing reinsurers and insurers to investigate how they can move into new regions, markets and lines of business in a meaningful and sustainable way.

Two trends for the coming few years in Artemis’ opinion, neither of which will be new concepts to our regular readers. Increasingly source-agnostic use of capital, which will also drive new capital market type structures (which blur the lines between traditional and alternative capital even more) and greater use of modelling and data within contract or financial instruments triggers. And, an increasingly innovative insurance and reinsurance market, leveraging the latest technologies, analysis and investment practices to maximise existing opportunities and to secure new ones.

You can access the full report from Deloitte here.

Read more of our January 2014 reinsurance renewal coverage:

Guy Carpenter: Capital, convergence, competition = reinsurance renewal rates fall

Aon Benfield: Buyers market at January reinsurance renewals

Reinsurance price softening broadens, overcapacity continues: Willis Re

$10 billion of new third-party reinsurance capital in 2013: Guy Carpenter

Declining reinsurance prices a credit negative for reinsurers: Moody’s

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