Why CEOs are stuck on GLOBALIZATION

Globalization is reshaping the world and the way we do business today, much the same way empire building redrew the map and business approach to trade during the time of Cecil Rhodes. But what is globalization, and how do we arrive at it?

Globalization has evolved beyond simply planting another corporate flag on the map. A recent Deloitte Touche World Economic forum described globalization as “the process by which businesses create value by leveraging their resources and capabilities across borders.” And, in today’s highly competitive environment, the best strategy for a company to become global appears to be through consolidation. At times, it appears that globalization and consolidation are moving in lock step — the most recent example being last year’s merger between Daimler in Germany and Chrysler in the U.S.

If consolidation is the strategy toward globalization, then mergers and acquisitions (M&As) are clearly the primary tools. 1998 was a record year for M&As. According to Security Data Company, corporate consolidations (hostile or otherwise) were up 50%, topping off at $3.2 trillion worldwide.

In the property and casualty arena, M&A transactions accounted for a wafer-thin $200 billion out of this total. After a strong start, M&As in the insurance industry limped toward the finish line in the second half of 1998, impacted by the financial crisis that tore through many Asian and emerging economies.

But it would be a mistake to read too much into 1998’s soft second half. It was still a record year for insurance M&As, and there are enough indications to suggest a V-shaped rebound will occur. In other words, the industry’s appetite for acquisition will return almost as quickly as it vanished. So what is the future of globalization in the insurance industry? Who will be the major players? What does it all mean to the crowded Canadian market?

Capital driver

Under-performing capital and declining barriers to entry will likely accelerate the pace of globalization through M&As, especially in Asia, where foreign companies are hungry for attractive targets at low prices. A World Trade Organisation (WTO) agreement governing financial services went into effect March 1999. This agreement kicks off the process for removing obstacles to trade in financial services, including insurance, banking and securities.

Specifically, nations agreed to permit access to financial markets, provide identical regulations for both domestic and foreign insurers, and have open rules and regulations. According to the International Insurance Council, the pact will cover over 98% of the world’s insurance business.

Insurance also continues to be one of the world’s least-concentrated industries. Despite recent consolidations here in Canada, the largest insurer, CGU, has a market share of 10.4% when you add together all of its companies. Royal & SunAlliance is Canada’s fourth largest insurer, with 6.3% of the property and casualty market. Only 24 companies have market share greater than 1%.

The Canadian experience is fairly consistent with what is happening elsewhere. According to the Insurance Bureau of Canada, no single insurer has more than a 12.5% share in the U.S., European and Japanese markets. The American property and casualty industry is certainly one of the most highly fragmented. Only a relatively few companies can claim more than 3%.

Playing in other’s backyard

Fragmentation and the removal of trade barriers suggest that there are a lot of opportunities for homegrown insurers to play in somebody else’s backyard, either through merger, acquisition or direct market penetration. A.M. Best predicts that up to one-third of p&c companies now doing business could lose their operating autonomy or withdraw from the market over the next five years — an indicator that the industry already sees M&As as the preferred route for building global insurance entities.

Still, the underpinning rationale for M&As is to achieve economies of scale (including the costly investment in new technology), expand distribution channels, and increase cross-border selling opportunities (global branding). In addition, globalization adds to these benefits by adding muscle in markets where a company may not be a major player. In the U.S., for example, Royal & SunAlliance is not currently one of the top players in terms of marketshare. At the same time, however, it has the distinct advantage of being backed by the size and financial strength of the global company — one with $143 billion in assets that can deliver coverage to American companies in 130 countries around the world. What remains to be seen is which foreign nationals will lead the charge.

Europe upstages North America

With 30% of premiums worldwide, American insurance companies appear to be the most likely candidates (Japan is a close second with 25% of global premiums). But it has been European — and not American insurers who led this most recent march toward globalization. In 1987, six of the world’s 10 largest insurance companies by total assets were American. These companies controlled just over 70% of assets among the top 10. Ten years later, only three of the top 10 were American, and they controlled less than 30% of the assets.

Prudential Insurance (USA) was the largest global insurance company in 1987. By 1997, it had been knocked off of its perch, and ranked fourth behind AXA-UAP (France), Nippon Life (Japan), and Allianz (Germany). Where only one European insurer — Prudential UK — cracked the top 10 in 1987, there are now three, including Royal & SunAlliance.

European insurers have benefited from lessons already learned in the evolution of a “Eurozone”. This single European market has exposed customers (business as well as personal) to transparency in pricing for their goods and services, and has taught insurance companies how to respond to cross-border buying and selling.

Still, it would be wrong to write off the American giants so early in the globalization sweepstakes. According to the 1999 Top 10 Insurance Industry Outlook, Deloitte Research predicts that American insurance companies are beginning to stir, awakened by the side benefits of globalization, which include global branding, cross-border transactions, and greater efficiency through global operating models.

According to KPMG’s Insurance Insider, Citigroup’s new integrated financial services model (created through the acquisition of Citicorp by the Traveller’s Group) may set the stage for the future of global finance. Some financial analysts believe Citigroup will build on the European concept of “bancassurance” by combining bank, insurance and investment banking operations under a single roof.

Canadian interests

What does all of this activity mean for the Canadian market place in general, and p&c in particular? More consolidation and new competitors. Much of the spadework has already been done. We have witnessed the blurring of lines that have traditionally separated Canada’s four distinct financial sectors: banks, trust companies, securities dealers and insurance companies. Restrictions on foreign entry have also been reduced, although to a lesser degree.

The Canadian industry has entered into a period of accelerated consolidation. According to the Insurance Council of Canada, over the last five years, the top 15 insurers have increased their collective market share from 45% to 58%. This trend is expected to intensify over the next five years.

For example, although p&c business represents only 3% of Canada’s total financial sector assets, there are approximately 230 competitors thrashing about in this crowded pool. Greater consolidation appears inevitable, especially among global players.

Royal & SunAlliance has been one of those players in the Canadian market — most significantly through the global merger of Royal Insurance and Sun Alliance in 1996, and more recently with the acquisition of The Johnson Corporation/Unifund Assurance Company and the Personal Lines business of Hartford Insurance Company of Canada and Hartford Fire Insurance Company.

Over the long-term, Canadians can
expect consolidation within the industry to also alter the products offered by established companies. There has already been some evidence of this south of the border. Royal & SunAlliance USA recently pulled out of the crowded American life insurance market. It is now concentrating on mid-market commercial products, where account sizes have more than doubled over the last five years.

Relaxed entry for foreign competitors, a low dollar and good fundamentals in the insurance industry make Canada an attractive market for insurers interested in extending their global reach. As the consolidation and globalization of insurance continues to take hold in this country, a new pattern of service delivery will emerge: we will have a market in which there are a lot of very successful, very profitable specialist types of operations, and a number of very strong, very global enterprises doing business all over the world.