The insurance industry faces some of the most testing market
conditions since the turn of the 21st century – impacting
brokers and carriers wherever they are located. Interest rates
remain low, albeit with some possible upward adjustment in the US,
while levels of competition in the market are keeping premium
levels depressed – a fact exacerbated by the inflow of
alternative capital into the reinsurance market. The recent vote by
the UK to leave the European Union also means that that, in this
region, there will be a sustained period of uncertainty. With thin
investment returns, insurance businesses are having to focus very
keenly on their underwriting results, and on strategies to reassure
investors that that there will be sufficient returns on equity.
Almost every public statement from carriers and brokers alike
talks about their search for growth, so we decided to use our
annual report to examine this trend. M&A as a route to growth
has certainly seen considerable popularity as a strategy in the
last several years – "achieving scale" has been
quoted by many a CEO. Market executives have been deploying excess
capital, and the ability to borrow cheaply, to look for inorganic
growth – seeking out deal activity that can deliver
consolidation, diversification and geographic reach.
Although 2016 has not yet seen the announcements of any of the
mega-mergers that typified the deal landscape last year, there is
no doubt that general M&A activity was buoyant in the last nine
months and, with no change in insurance market conditions forecast,
few businesses would rule out some transactional activity in the
Volume of insurance deals completed globally: January 2009
– March 2016
The appeal of M&A in achieving scale has clear advantages,
but the challenges of finding a suitable target and, significantly,
at a suitable price, may cause insurance businesses to consider
more organic routes to growth, depending on location and the
characteristics of the market.
Over the last several years we have
seen a desire to enter new markets through the establishment of a
branch or subsidiary. South East Asia is a particular example of
this trend, where low insurance penetration rates present an
attractive proposition for insurers in mature markets experiencing
modest growth levels. However, many jurisdictions in the region are
characterised by a lack of obvious or appealing targets. Singapore
is one such market where we have seen a significant uptick in
interest from international re/insurers looking to set up shop and
establish a base for wider access to markets across the region. In
another example, Miami is emerging as a regional hub for Latin
American and Caribbean re/ insurance business – attracting a
number of international players who are drawn by its deep
connections with and accessibility to the wider region.
Joint ventures (JV) with a local partner have long been a
popular route to growth, especially in countries where there are
limitations on the level of foreign participation. Overseas
investors in the past have been prepared to take minority positions
in a JV as a means of establishing a foothold in the market with
the expectation that they would be able to build out their position
at a later date. In some significant markets, such as China and
India, the foreign direct investment limits have been raised and,
as a result, there has been considerable activity in the last year
by international insurance businesses to increase their
Lloyd's of London also offers joint venture possibilities,
which are seen as an increasingly attractive way to enter a market
that has a decreasing number of acquisition targets. Last year
Beazley and Korean Re established a special purpose syndicate (SPS)
at Lloyd's, which is supported by a two-way programme of
reinsurance as well as employee secondment. Another recent example
was Patria Re of Mexico teaming up with Pembroke. We expect this to
be a continuing trend.
The other development we have seen this year is that, in
response to the on-going difficult trading conditions, a number of
larger insurers have taken a long-term bet to deploy venture
capital into technology start-ups around the world. According to
recent data from Accenture, insurance technology start-ups
attracted USD 2.6 billion of investment in 2015, up sharply from
USD 800 million the year before.
By expanding the scope of this report to go beyond M&A, we
have explored some interesting trends in how insurance businesses
are seeking expansion. With market conditions not expected to
improve in the foreseeable future, there can be little doubt that
we will see more businesses looking for creative answers to the
issues they face in the next few years.
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