Ratings agency A.M. Best said in a recent report that intense market competition in reinsurance is ramping up the need for merger and acquisition (M&A) activity.
Market conditions appear to be stabilising, in terms of reinsurance pricing as seen at the recent January renewals, but quality of earnings are under pressure and A.M. Best is predicting consolidation will continue as decent returns become increasingly hard to achieve.
A.M. Best said the market is driving reinsurers to innovate; “It is extremely difficult to build a better mouse trap, but that should not hinder the search for niche businesses or strategies that are difficult to replicate and therefore prove more stable over time.”
M&A activity has been by far the most important survival strategy for reinsurers looking to secure their organisation over the long-term, says A.M. Best.
But formations of joint ventures, increased research and development to close the insurance gap, use of big data in underwriting, and entry into new data-rich classes of business are among other important strategies that are developing to ensure growth, according to the ratings agency.
M&A is no panacea either, with some reinsurance mergers proving difficult to execute as cultural and strategic differences do not always fit together in an ideal way. That means reinsurers need to be wary of the length of time that M&A transactions can take to make a positive difference to their returns.
