Xuber Reinsurance Survey Focuses on Regulation and M&A

Many in the reinsurance industry feel the business is becoming over-regulated and London is getting expensive as the center of the industry

Xuber, Xchanging’s insurance software business, recently released its second wave of results from its global reinsurance survey on regulation and mergers and acquisitions (M&A) activity.

The survey found that, with reference to the regulation of re/insurance industry rspondents were split, with 41 percent believing it is over-regulated, 39 percent disagreeing, and 20 percent unsure. One interviewee said the industry is over-regulated and “it was getting worse,” while another countered “relative to banking, most definitely not.”

The survey was conducted, after it became clear that Solvency II regulations for European Union-based insurers and reinsurers will finally be implemented at the start of 2016, and at a time of other U.S. and international rulings.

The XUBER survey pointed out that the London Market Group (LMG) report of 2014 warned that “London’s position was at a ‘tipping point’ as its share of the global reinsurance market fell from 15 percent to 13 percent between 2010 and 2013.”

Forty-five percent of respondents believe the regulatory burden of doing business in London is putting reinsurers off operating in the city.

However, Xuber also noted that the survey had a “silver lining” as it found that for many, “while London may be expensive, the quality of the underwriting, the concentration of expertise, and the vibrancy of the market made it a price worth paying.”

“Lloyd’s is undoubtedly more expensive to do business but it is worth it,” said one survey respondent.”

Another respondent described the market as having “performed exceptionally well since the 1990s through some tricky times and has really shown its worth.”

“London is still the center of the reinsurance world and people wouldn’t continue to do business in London if it was just down to cost. The business case to be in London is so persuasive that companies will deal with it,” said another.

The survey also confirmed that executing and implementing mergers and acquisitions (M&As) was at the forefront of industry leaders’ minds. Ninety-five percent said the cultural integration challenge reinsurers will face as a result of M&A is among their top concerns. This was followed by the integration of multiple systems (83 percent) and distraction from business as usual (80 percent). One executive said: “The biggest cause of failure in M&A is lack of leadership and cultural fit.”

Xuber Executive Director Chris Baker agreed that handling integration can be critical to success.

“Bigger does not always mean better, and the mismanagement of the cultural integration between merged companies can ultimately undermine the potential value created,” he said. “Fusing diverse cultures can deliver immense value as both companies bring something unique and different to the table. Mergers and acquisitions create anxiety amongst employees, and both companies are keen not to lose a culture that works for them and is meaningful.”

M&A activity has definitely increased, beginning at the end of 2014. According to A.M. Best, in 2014 there were 50 international reinsurance companies that wrote more than $500 million of gross reinsurance premiums, with Munich Re the largest ($38.3 billion) and Wilton Re the smallest ($506 million).

“This landscape is set to change drastically with the current wave of M&A,” says the Xuber report.

Yet respondents were divided over the actual impact: When asked to predict how many reinsurers will be writing $500 million or more in gross written premiums in 2017, opinions were mixed with 40 percent thinking there would be between 40 and 50, followed by 20-30 (23 percent), 30-40 (20 percent), more than 50 (15 percent) and 10-20 (2 percent).

M&A will inevitably lead to fewer reinsurers, but an overwhelming 80 percent of those surveyed did not believe this would lead to less competition, while only 18 percent did believe the market would be less competitive, according to the report.

Baker added: “We have been listening intently to the market to better understand their anxiety points. As there has been so much M&A activity in the market recently, it is no surprise that this is front and center of their concerns.

Source: Xuber