Consolidation fuelling reinsurers’ desire to grow and diversify in U.S.

Reinsurers seem to feel the need to grow and diversify, but the current wave of consolidation presents its own challenges, attendees heard during a recent Casualty Actuarial Society (CAS) reinsurance seminar in Philadelphia.

Meyer Shields, managing director of Keefe, Bruyette & Woods and a CAS fellow, is quoted in a CAS press release Monday as saying “the current wave of consolidation arrives after two to four years of low rates have driven profits lower for a given level of risk. To offset, reinsurers feel the need to grow and diversify.”

Responding to questions from the panel moderator at a session titled Mergers & Acquisitions in the Property & Casualty Industry, Shields noted that insurers are holding more risk themselves. For smaller reinsurers, he acknowledged size may bring some expense efficiency, but cautioned there are not a lot of economies of scale in underwriting.

Alan Zimmermann, managing director of Assured Research, told attendees that he previously regarded mergers “as a largely negative shift, since a company’s largest liability, loss reserves, is difficult to value,” notes the CAS statement.

But now that the p&c market has been so mature for so long, Zimmerman suggested further conventional growth seems difficult. Mergers and buying entire books of business make more sense, he reportedly said.

Zimmerman agreed with Shields that mergers rarely bring underwriting efficiency, pointing out that “insurance mergers generate meager expense savings compared with combinations in other financial industries, such as banking.”

Despite the recent uptick in reinsurance company mergers, notes the CAS statement, “corporate combinations can be a challenge to pull off successfully.”

Shields suggested to attendees that mergers can be tricky for the acquiring company, though, because “they are assuming all of the risk.”