Further sector consolidation would allow re/insurers in the European market to better leverage investments in digital innovation by sharing the costs across a wider revenue base and creating economies of scale, according to analysts at J.P. Morgan.
A recent report by the firm suggested that, while investment in digital is growing at a rate of 20% +, the benefits of these investments come with a lag of around four years and entail significant costs and legacy systems overhauls.
With Western European re/insurers currently investing roughly €12 billion in digital innovation, J.P. Morgan believes that costs are manageable for now, funded by cuts in admin costs, in IT for legacy systems, and lower claims.
However, consolidation may come to form a key pillar of digital investment as other approaches to funding become more challenging, such as in cost cutting, where the most obvious solutions have already been implemented.
Analysts suggested that consolidation will be mostly likely to benefit midcap insurers and groups with smaller market shares due to the relatively ‘lumpy’ costs of investment in digital innovations.
Within the group of midcap insurers followed by J.P. Morgan, the report listed GCO, Mapfre, Cattolica, Unipol, Baloise and Storebrand as most likely to benefit from the increased economies of scale in the digital world afforded by consolidation.
So far there has been relatively little consolidation in the European market, the report added, but this is likely to accelerate as digital begins to take up a larger proportion of revenues.
Going forward, J.P. Morgan said that it believes the risk for the current business model of incumbents, where the higher cost of digital is partly paid by lower claims costs in motor, is what happens when claims costs start rising again and could happen if inflation returns.
In this case, combined ratios are likely to rise due to higher claims cost inflation, and insurers will likely focus even more on cutting costs, which could lead to more sector consolidation as companies look to digital to drive higher economies of scale more effectively.