Solvency II may drive mergers and acquisitions activity: Guy Carpenter

Solvency II capital requirements may put pressure on insurers to diversify their risks, which is likely to generate incentives for mergers and acquisitions activity within the insurance industry, according to a March 2011 report by Guy Carpenter.
The report, Succeeding Under Solvency II, discusses a number of observations related to the forthcoming application of Solvency II to European insurers. For example, it includes a discussion on the likelihood of larger companies adopting internal capital models, whereas smaller insurers and niche companies might be more likely to adapt to the standard capital model required by Solvency II.
The report also discusses the disproportionate effect of Solvency II’s proposed standard capital model on mutual and monoline insurers. This may ultimately be of some benefit to reinsurers, since such firms may choose to adapt to higher capital requirements by increasing their reliance on reinsurance.
Also, “diversification is expected to become a major component of capital requirements, potentially reducing the capital charges by 25% to 30%,” the Guy Carpenter report says.
Guy Carpenter suggests the lack of geographic diversification of some mutuals is an important issue dominating discussions related to Solvency II.
“One possible solution may be to allow mutuals to regroup across country borders in order to receive the benefit of geographical diversification,” the report says. “Finally, the advantages of diversification are likely to generate incentives for mergers and acquisitions within the industry.
“Mergers and acquisitions (M&A) activity among insurers is expected to increase under Solvency II.”