Market conditions for insurance businesses have not improved during the last 12 months if anything, they may have slightly worsened. Rates remain under pressure. Interest rates haven't moved - although they are expected to trend up in the US following the recent rate rise and the election of Donald Trump. Investment returns are generally low, even if some equities may have performed slightly better than expected. Furthermore, we remain in a period of political and economic uncertainty stemming from Brexit and the new US administration. In this environment it is difficult to tread water and stay afloat, let alone move ahead of the competition by delivering the growth that shareholders expect.
Notwithstanding such uncertain market conditions, a merger or acquisition (M&A) remains, for many insurance businesses, a popular strategy and solution to deliver scale, diversification and access to new markets. A transaction can also provide synergies that offer significant cost savings. In the coming year, we expect to see an increase in M&A, driven by these and a number of other emerging factors.
Distress drives disposals
It is inevitable that after five or six years of difficult trading conditions, we will see a higher proportion of distressed businesses being put up for sale.
Brexit encourages action
Another key driver of deal-making is Brexit, which has led to many of the larger insurers headquartered in the UK looking to set up subsidiaries in one or more of the EU27 nations in order to retain passporting around the single market. At the other end of the spectrum, smaller targets may become available if they consider it too difficult or expensive to continue operations post-Brexit.
Volume of insurance deals completed globally 2009-2016
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Regulators make their move
Elsewhere in the world, regulatory developments have indicated a move to a more protectionist stance on the direct as well as the reinsurance side, in countries as far apart as South Africa, China and Ecuador. Companies looking to do business in these markets will increasingly have to have a presence on the ground, which they may achieve either by M&A or starting up new operations.
India on the march
Entering into new markets by setting up a branch or subsidiary continues to be another attractive route to growth, especially where barriers to M&A exist. The new rules in India have seen the large global insurers move quickly to set up new offices and position themselves in a market which offers genuinely huge potential. Elsewhere, a number of destinations such as Singapore, Dubai and Miami continue to position themselves as regional hubs where international players can set up operations with the intention of establishing greater access to the wider markets in Southeast Asia, the Middle East and Latin America.
Joint ventures (JV) also remain a tried and trusted route to access local knowledge or technical expertise to build or strengthen a position in new markets. For example, following a change in the law in India, a number of international insurers moved quickly to increase their stakes in local JVs to the new permitted level of 49%, up from the previous limit of 26% via the automatic route i.e. without prior approval of the government. Elsewhere, in Brazil, Swiss Re agreed to form a JV with Bradesco Seguros, and gain access to the company's approximately 40,000 registered insurance brokers and agents.
Technology dominates boardroom discussions
However, it is technology which has seen the greatest increase in interest in the past 12 months and that is expected to increasingly dominate the boardroom agenda in coming years. Insurance businesses are looking at how they can deploy innovative technological solutions to reduce their cost base. At the same time, technology is rapidly cementing itself as the key to accessing new customers in new markets the Holy Grail for those looking for growth.
An increasing number of insurers are putting their money where their mouth is investment into Insurtech startups rose 42% in 2016. Regulators in markets including the UK, Singapore and the United Arab Emirates are working together with innovators to help create the right conditions for new products and solutions to emerge and thrive, although others notably the in the US have some catching up to do in this regard.
Changing times require a paradigm shift
Looking more broadly to the future drivers of growth, it is our view that the insurance sector is set for a paradigm shift. In an increasingly globalised world, where risk is ever more interconnected and challenges to economic resilience abound, there is an opportunity for the re/insurance industry to reinvent itself as a technology-enabled provider of insight, products and services that strengthen the global economy against the impact of both natural and manmade catastrophes.
Whether the solution lies in a combination of old world solutions like better packaged covers or micro-insurance to help close down protection gaps; or the invention of new covers like parametric cat bonds and integrated cyber and supply chain programmes that respond to highly complex interconnected global risks; the opportunity is now.
With competition to leverage these opportunities showing no sign of diminishing, and tough market conditions expected to continue for the foreseeable future, there is no doubt that insurance businesses around the world will continue to look at all available avenues in the search for growth.