Risk managers at DVS fear M&As will reduce choice and capacity

Risk managers interviewed by Commercial Risk Europe during the opening day of the DVS Symposium in Munich yesterday believe that the M&A activity will likely lead to less choice and a reduction in capacity for large corporate customers. Most agree with insurers, brokers and other market experts who spoke to CRE during the event that the deals are primarily driven by the desire to cut costs and achieve growth in a stubbornly tough and soft European and international commercial insurance market. The companies that are carrying out the M&A point to the potential advantages for customers, such as wider international networks, greater financial strength and capability to deliver broader and deeper risk solutions for difficult risks, as they announce the deals. But most experts are agreed that the prime spark for the deals is the lack of investment income combined with a lack of organic growth opportunity.hideAs a result the main beneficiaries will be investors rather than customers, but only if these highly priced deals can be well executed. Indeed, another of the concerns voiced by risk managers is that the pain and effort involved with integration following a merger or takeover will leave even less time for insurers to dedicate to innovation and service. Though one insurer did suggest that in the longer term it could deliver a sector better able to cope with the ever more complex risk management and transfer needs of customers. “It is all driven by the need to cut costs and achieve efficiencies in areas such as IT spend,” one former leading German risk manager now with a top industrial insurance group told CRE. “There is also the factor that people sit in boardrooms, see the first deal and ask whether they should also do it rather than miss out. The need for an international network is important in this market. We already have it and so do not feel the need to do such deals but others need it, such as the Japanese,” he added. Two big Japanese companies have been active in recent deals. Only this week Mitsui Sumitomo announced a £3.47bn deal for Lloyd’s insurer Amlin at a 36% premium to Amlin’s share price. Tokio Marine announced its $7.5bn acquisition of US-based HCC Insurance Holdings in June at a 37.5% premium. Peter Klatt, former head of insurance at BMW and now a consultant with specialist recruitment firm le groupe bleu, said he is not that surprised about the consolidation. Industrial insurance prices have been so low for so long that it is difficult for insurers to make profits, he said. “Mergers help to reduce costs if done well. But it may reduce global capacity ultimately and may also possibly reduce choice for risk managers,” he said. Gaëtan Lefèvre, Group Risk & Insurance Manager at Belgium-based engineering firm CMI and President of the national risk managers’ association Belrim, said that one competitor less is not a good thing for the market. “It means less capacity and less competition. Also I wonder how some of these mergers and takeovers are going to work. Will they be a good cultural fit? It could be a big cultural shock to some of the European underwriters at the acquired companies,” he said. Julia Graham, President of Ferma and Chief Risk Officer at law firm DLA Piper, said that she is also worried about less choice, the reasons for the deals and how the merged companies will actually fit. “My concern is the reduction of choice, particularly when you see mergers of companies with similar specialty areas. The merged companies may be bigger but the overall effect can be a reduction of capacity. You also have to ask whether these companies are merging for the right reasons and how well the organisations will fit. But so far I do not see any problems,” she told CRE yesterday in Munich. Franck Baron, founding President of the Asian risk management association Parima and risk manager for medical and travel risk services company International SOS, said that he believes the trend is driven by economics. “The M&A activity is driven by the global financial and market environment with capital available at cheap rates. At the same time combined loss ratios are very tight and have been like this for a very long time, hence the need to leverage consolidation to improve financials and profitability by means of synergies and cost savings,” he told CRE. Also the globalisation of business generally demands that insurers develop a stronger and wider geographical footprint to respond to clients’ needs, he said. There is also a growing emphasis on ever more and conflicting insurance regulations around the world that fuel a rising cost of compliance to secure licences to operate, added Mr Baron. “What does this mean for risk managers and corporate insurance buyers? Less places to shop around and lack of client focus as carriers are drawn into internal reorganisations,” said Mr Baron. “I strongly hope this process will also allow new players to enter the market in order to provide the more-and-more specialised coverage needed by corporates. But consolidation is rarely considered as the right platform for innovation. This worries me as the market is really challenged to provide the right covers such as multi-line programmes, global supply-chain risk coverage and reputational asset cover,” added the Parima president. Tony Buckle, CEO Europe, Middle East & Africa, Swiss Re Corporate Solutions, said that he sees both positives and negatives from the M&A activity for customers. “Companies feel they need to be bigger than they currently are and therefore need to find a partner to team up with. If it leads to stronger balance sheets then clearly it is a good thing for risk managers because they do not want failures: they want stronger partners,” said Mr Buckle. “But also clearly many risk managers want diversified panels of insurers on their programmes. If they had five and it becomes three because of the M&A activity then it could be a concern for some,” he added. Mr Buckle said that in the longer term he hopes that consolidation will help the market as a whole work out how to more effectively grow the ‘insurable pie’ and that these moves make insurance more strategically relevant to corporations. “We need to innovate and increased scale may enable the sector to push such an agenda,” he concluded.

Risk managers at DVS fear M&As will reduce choice and capacity

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