Today’s capital rich reinsurance industry is positioned well for innovation and expansion into emerging markets, but analysts at RBC Capital Markets (RBC) feel the pressures from a softening reinsurance sector overshadow the scope for opportunity, for the near term at least.
Analysts from RBC recently published an equity research report debating the opportunities and challenges for European insurers and reinsurers in emerging, underserved global markets.
But despite noting some positives for companies that attempt to enter emerging business lines, including premium growth and a local presence, RBC indicates concern at the difficulties and demands firms are faced with in the softening reinsurance market environment.
“Despite our positive stance on the emerging market potential for reinsurers, we believe that pressures from weakening reinsurance pricing outweigh this opportunity in the near term,” said RBC.
Continuing to note that primary insurers are currently better equipped than the European reinsurers to enter emerging market opportunities.
The analysts go further still, stating that the “potential opportunity is very large for premium growth into emerging markets. However, we do not expect that this growth will all come through in the medium term.”
Entry into new, developing, underinsured and vulnerable markets of the world, like China, Brazil, India and other parts of Asia boils down to increasing penetration levels, something at the forefront of industry discussion on climate and disaster resilience efforts.
According to analysis by RBC, global non-life penetration levels average 2.7%, but the reality is that many countries, particularly the poorest regions of the planet are unlikely to achieve this growth, “even in the middle term.”
One way firms can, and have offset the challenges of the current re/insurance sector is through merger and acquisitions (M&A), and RBC notes that this is one way companies can access the potential of emerging markets, either by increasing in size and balance sheet scale, or partnering with a local re/insurer.
On M&A activity in emerging sectors, RBC said; “We expect that many deals in emerging markets will be quota share driven initially in our view. Having a large balance sheet, and strong capital position would help the largest reinsurers to secure this business.”
Adding, and echoing its previous views, RBC notes; “As a result, we believe that top line growth in emerging markets will not follow a smooth pattern of growth, but will instead emerge in a ‘lumpy’ fashion.”
The message from RBC is that for larger European reinsurers the opportunity for growth into emerging markets is clear, but for the smaller players, unless they’re positioned locally either through M&A or an established regional branch, the current pressures on pricing in the sector will likely prove to much of a challenge to pursue any opportunities.
It’s worth noting though, that others believe the trend has turned and that the availability of lower-cost and efficient alternative capital is now stimulating growth, opportunity and innovation in reinsurance, even for the smaller players. There is a growing expectation that this will accelerate as the market begins to plateau and players put capital to work.