M&A in reinsurance, a red flag for employee benefits captives
From the October 2015 Baden-Baden Reinsurance Meeting.
The consolidation of the reinsurance industry that is being observed in 2015 apparently is driven by capacity overload, successive years of rate declines and persistently falling profitability. But are mergers and acquisitions (M&As) the right answer?
Of course, sheer scale matters but the upside of better mutualization hits its limits fairly quickly and unmanaged diversification is fraught with dangers. In fact, new capital vehicles, higher velocity of capital, etc, are other avenues worth considering for meeting the challenges of the reinsurance marketplace. Even more importantly, the fundamentals of client orientation, professional execution and sustainable business models must be honored at all times. That being said, external growth, if and when it brings additional, relevant capabilities to clients and is well-executed, certainly is a proper way for reinsurers to stay relevant, visible and well-performing in tomorrow’s challenging markets.
As a further comment, it is a well-documented fact that M&As often act as a pleasant but dangerous diversion for senior executives and boards alike, distracting from day-to-day business execution, client orientation and other management “chores”; in a word, M&A is fun! Furthermore, post-merger integration is a peculiarly complex matter that may or may not be within the capabilities of the executive team. Global employee benefits practitioners working for multinational corporations or for global consulting firms have often been involved in such projects from the HR side of the business and know first-hand how difficult a trick to pull it is.
Therefore, failed or marginal M&A operations in the reinsurance industry are to be expected and ceding entities such as employee benefits captives should exert caution and discretion in their choice of reinsurance providers, taking into account any involvement in consolidation activities as a significant risk factor that cannot be offset by lower rates, but only by past experience, proper planning and disciplined execution of the post-merger integration phase.