Reinsurance News

Coronavirus + broker M&A distribution disruption raises threat to carriers: Hyperion X

3rd April 2020 - Author: Steve Evans

While the immediate impacts and losses from the Covid-19 coronavirus pandemic are top of mind in threatening the businesses of insurance and reinsurance carriers right now, the fact it coincides with the biggest disruption to the distribution chain ever seen adds more pressure, Hyperion X said.

options-choice-changeHyperion X, the data and analytics focused unit of the Hyperion Insurance Group, highlighted the additional challenge that a reduced number of distribution options could present to some re/insurers in a recent report.

“The Coronavirus situation has emerged in the wake of one of the biggest market disruptions of the last decade, the rapid merger of the world’s previously top four brokers by revenue,” Hyperion X explained.

The reason being that, “The mergers mean that in many cases, distribution channels are reducing or shrinking just when they are most needed.”

The insurance and reinsurance market has just begun recovering from the bringing together of two major players, as Jardine Lloyd Thompson (JLT) was acquired by Marsh & McLennan (MMC) in 2019.

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Now, the re/insurance market faces a similar coming together, as Aon is set to acquire Willis Towers Watson, to create the largest insurance and reinsurance broking house in the world.

Of course, these are challenging times to execute an M&A deal anyway, as we explained there is no guarantee in progress M&A processes get completed right now, although we are sure parties will do everything they can to get them over the line.

But this dramatic shrinking of the big four broking houses in insurance and reinsurance down to just two options has had an effect on carriers options for getting capacity to market and given the crisis faced due to coronavirus it is an added pressure.

Hyperion X says it is estimated that, “The ‘big 2’ such as they will be, could represent more than half of all placed premiums in many business lines, and even more in specific cases such as syndicated reinsurance.”

In some locations and marketplaces this concentration of distribution will be even more pronounced, the company explained, such as in Bermuda and London where Hyperion X already believes acquisition costs are at decadal highs.

This, alongside the clear crisis related to the coronavirus, will impact carriers and make the management of them progressively more challenging, Hyperion X says.

Among the issues expected to be faced by re/insurance carriers due to the coronavirus outbreak are: Lower investment yields; worsening underwriting results; the impact of sustained decreased economic growth on premiums; the potential for regulatory action on coverage extensions that could drive future reserving risk; increased costs-of-capital on equity, debt and reinsurance sides of the capital structure; ongoing reserving uncertainty exacerbated by changing discount rates and inflation assumptions; as well as other emerging risks that accompany an economy in flux.

But specifically related to the broker M&A and reduced distribution options, Hyperion X notes the risk posed by: fewer future distribution options due to the merger of the world’s previously four largest insurance brokers; and the challenges of accessing traditional distribution channels where technology solutions are not sufficient to meet demand.

We’d add another distribution challenge, which is the fact many distribution and placement technology platforms are not really aiding carriers efficiency at all.

Rather they boil down to electronic filing systems, often used after the fact of the transaction, rather than a real-time way to transact or trade in insurance and reinsurance related risks.

E-trading and the term electronic placement are in the main misnomer’s when used regarding the majority of market platforms and broker owned systems.

Generally they are not trading at all. Rather they are electronic replacements for traditional processes.

Which, while far better than the face-to-face version in the current climate, can actually end up costing quite a lot in terms of effort to adopt them and fail to bring any real efficiency gains into the system as well.

Fewer distribution options mean carriers should be looking actively for open, third-party owned systems that can truly add efficiency in the way they match risk and capital, as well as providing them with another distribution channel through which to marshal their capacity and source risks.

As our sister publication Artemis explained recently, it is time electronic trading of risk was embraced by the industry and right now seems the right time for carriers of all types to make their feelings known and add new distribution options to their businesses before their options are reduced.

When your options become restricted it’s the right time for management teams to be looking at how to expand them in other ways and today’s technology innovation could be one way carriers can regain more control of their own destiny.

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