Buying spree set to restart
Industry consolidation likely to regather pace, says Willis Re Global CEO
Insurance industry M&A is set to accelerate after a pandemic-induced hiatus, predicts James Kent, Global Chief Executive Officer of Willis Re. “Scale definitely matters in this market… particularly in reinsurance,” Kent says in the latest episode of Hiscox MarketTalk.
He tells Paul Lawrence, Hiscox London Market’s Chief Underwriting Officer: “It doesn't mean that there isn't a place for small entrepreneurial nimble companies. But…it does point to more merger and acquisition [activity]…[B]uilding something from scratch, or…building organically takes time…but inorganic growth can accelerate [expansion].”
Insurers’ increasing use of technology is helping them to reduce their expense ratios, making acquisitions “a compelling proposition”, Kent says. So too is the low cost of capital today, meaning “the ability to go and get cheap debt is there.”
Lawrence says he expects the industry to become increasingly polarised, with some companies that “just keep getting bigger and bigger” while at the other end of the scale, “you have a tiny boutique business, which offers a completely different service: more personal, more hands on, fewer customers, but an incredibly small and probably outsourced back office model.” Medium-sized businesses are, he says: “getting sucked into the giant guys, leaving a few entrepreneurial people to restart small boutique businesses.”
Book early to avoid disappointment
A landfalling hurricane in southern Florida in the next couple of months could really test the insurance and reinsurance markets, coming hard on the heels of the COVID-19 crisis. But, Kent says, the market is already hardening, even without a $50 billion hurricane to soak up excess capital. Insurers are taking the lead in pushing up rates, using the better data they now have at their fingertips to more accurately price the underlying risks in their portfolios.
Kent advises insurers to secure capacity early with a small handful of reinsurers ahead of the 1 January renewals. “I don't believe we've ever been in a more important market where you go to your core trading partners,” he explains.
Reinsurers are increasingly earmarking most of their capacity – as much as 85% or more – for their core clients. So, Kent advises insurers to follow “the basic rules [:] maximum transparency on data, come to market early even if that doesn't mean that you're going to bind early… be as transparent as you possibly can and establish who you want as your core trading partners.”
Hiscox’s strategy is to try to secure early reinsurance capacity for its non-catastrophe-related risks as early as it can, Lawrence says, and then try to open negotiations on buying the catastrophe reinsurance it needs from October.