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New insurance behemoths scoop up business globally Back  
Global concentration of insurance has a direct effect on the Irish market and points to risks for market stability which must be addressed, writes Ray Kinsella
It is a big - a very big-deal. The combined CGU/Norwich Union merger will create a global insurance giant, with a market capital of ?18 billion, gross premium income of ?25 billion and Funds under management in excess of ?200 billion.

The merger is the latest stage in a process of acquisition-driven consolidation that is transforming the global insurance market place. The Irish insurance market is being caught in the slip steam. It is not over yet - there is still a long way to go. Nor are the strategic implications - for banks, amongst others - clear. The very nature of Insurance - the pricing and transfer of Risk - is being worked over, as Alternative Risk Transfer (ART) rapidly develops outside of the traditional insurance paradigm.

The topography of the insurance market place is visibly changing. So, too is the way in which insurance providers engage with customers. So, the CGU/Norwich Union merger is important in itself; in what it signifies about what’s happening in the industry and, equally important, in the response that it is likely to evoke amongst its new peer group.

The global market

Table 1 highlights the fact that there is now a ‘Premier League’ of global insurers.

It understates, if anything, the market reach and financial muscle of these bemoths - and especially the latent scope for change - through acquisition, diversification and organic growth - embedded in their balance sheet.

Two factors are likely to add additional momentum to the consolidation process. Firstly, recent changes in the capital gains regime in Germany will allow the world No.1, Allianz, to divest itself of the substantial investments in non-core sectors. These resources will be put to work. Royal and Sun Alliance - which is represented in Ireland - is now directly in the firing line. Such an acquisition would facilitate Allianz entry into the important US market. Equally, of course, AXA - which has grown enormously quickly through acquisition - has the capacity to make such a bid.

Impact on the Irish market

The merger reinforces the consolidation that has transformed the face of Irish insurance market over the last five years. A glance at Table 2 shows how the non-life market has changed. It really is a quite unprecedented transformation. And it is set to continue. Table 3 indicates the market share position in terms of gross pensions annual premium income for the top six players in the Irish insurance industry.

What we are essentially looking at are three major players: Allianz (Church & General), Cornhill and Irish Insurance Corporation); AXA (Guardian/PMPA) and, now, CGNU (General Accident, Hibernian, Norwich Union).

CGNU’s pre-merger decision to retain the Hibernian brand following its acquisition last year is a key outcome of the shake-up. Hibernian’s strong position in the non-life market will provide very considerable leverage to Norwich Unions motor and casualty book.

The impact on the life side is, if anything, even more far-reaching. This is hardly surprising. The whole global and UK logic of the CGU/Norwich merger is precisely to strengthen the combined group’s position in the life/long-term savings market. This resonates with the likely impact of the merger in the Irish market.

Norwich’s strengths lie in the life and pensions products and will complement and broaden Hibernian’s suite of products. There will eventually be some rationalisation with the inevitable human resource causalities this will entail. The net effect in purely market terms will be to strengthen Hibernian’s position as a major composite insurer.

Further change is inevitable. To begin with, at the global level, attention has as noted, shifted to Royal Sun and Alliance, - who are, of course, established in Ireland, as a likely acquisition target. Allianz is the probable predator. This would further reinforce the presence of Allianz Church and General in the Irish market. Recent and prospective developments are likely to fire AXA into strengthening its own position. The Irish banks, especially through their respective life and pensions subsidiaries, will face increased competition, albeit in a dynamic and growing market.

And in the longer run…

Firstly, the insurance market has become more concentrated. Concentration will rise further. The important point here is that, previously, this would have raised anti-competitive concerns. In practice, because of increased global consolidation - which is inevitably reflected in national markets - both national and EU competition authorities now have to take a broader view of increased market concentration and its possible impact on competition. New distribution channels and the growth of bank assurance, together with the increased contestability of the financial markets generally arising from technology, have diffused the latent adverse effects of concentration on competition.

Secondly, the new global insurers are driven by the imperative of generating shareholder value. It is this that will decide the allocation of capital to national markets and to specific businesses within these market. Insurers are likely to require a minimum return on capital of at least 15%. What this, in turn, means is that for a given market to be competitive - that is, to be open in practice to new entrants - will require that these entrants can achieve at least this rate of return.

Competition and competitive markets do not exist in a vacuum: they need participants - especially global participants, with all that they bring to the market place. To take the Irish PMI market as an example, the Government’s goal of a ‘competitive PMI market’ cannot effectively exist where artifacts such as ‘risk equalisation’ effectively precludes new entrants - because, quite simply they make it well neigh impossible for such entrants to generate the required rate of return on their capital.

What is in prospect, therefore, is a lessening of national authorities control over national insurance markets and a more demanding commercial regime. In principle, this should bring benefits - in terms of cost and product innovation - to customers. Having said that, businesses which do not generate sufficient shareholder value - which are under priced - will be re-priced. Motor business is a case in point. The ultimate effect will depend on how lower-cost access and competition offsets the irresistible upward pressure for full economic pricing so as to generate an acceptable return on capital.

Impact on regulation

Thirdly, there are regulatory and market stability issues which arise from the impact of global consolidation in the insurance market. There has, of course, been considerable EU harmonization as well as the development of ‘core principles’ and ‘standard-setting’. But the fact is that the nature of insurance is being redefined. Risk is migrating to the capital markets, where it means a quite different thing to traditional underwriting risk.

Moreover, insurance now encompasses banking and Fund management. There is considerable locational arbitrage, especially in the reinsurance sector. The point is that voluntary cooperation, through the International Association of Insurance Supervisors (IAIS) - which has a permanent staff of 5 people - means that effective, proactive supervision is lagging further and further behind the momentum of market change. It would be facile to say that there is an easy answer. There is not. It would be equally facile to claim that there are not systemic risks. There are. In the case of Ireland, these developments highlight the clear and present risk of diluting, within a Single Regulatory Authority for financial services, responsibility for market stability, by folding it in with consumer protection, which has a quite different focus.

Banks under pressure

Finally, there are the implications for the banking sector. Now, it is true to say that banks have proved strategically adept at adapting to the new environment. They are more robust today than, say, a decade ago. In Ireland, the major banks have been markedly successful in leveraging their advantages by diversifying - through ARK Life and Lifetime - into the life and pensions business. The development of Irish Life and Permanent is a perfect case study in market adaptation. But specifically in relation to banking, there are longer-term forces that cannot be gainsaid. And the consolidation of global insurance, and the emergence of global leaders such as Allianz, can only serve to accentuate these forces. Just a word on these.

The value of the banking franchise is under pressure and is being eroded. This has to do with the increased contestability of the market. It has to do with disintermediation - the progressive crowding out of banks by the securities markets, notably in the US, but increasingly in the EU (as recent European Central Bank studies demonstrate). The process of adverse selection - where banks, in effect, progressively are left with less attractive riskier corporate customers, as more robust companies access the securities/capital markets - accentuates these difficulties. Bouyant economic conditions may disguise - but cannot reverse - this difficulty within the traditional banking template.

Net interest margins are contracting under the twin-pressures of competition and a secular decline in interest rates. This decline has demolished the attractiveness of traditional bank savings products. Banks have been impelled to develop ‘shareholder value’ strategies around fee generation and capital-market based products. These strategies include bank assurance and fund management.

New battleground

Effectively, the center of gravity in banking is shifting away from traditional intermediation and precisely towards the battleground being staked out by the new (re) insurance giants, like Allianz, Swiss Re, and prospectively CGU/Norwich Union. This market is dynamic, with considerable growth potential. But banks will need to re-think their whole rationale and strategy to be competitive. The capital market-based (re) insurers have enormous balance sheet capacity as well as strategic options that they have not, as yet, exploited. A case in point is the possible scope for Allianz to use as holdings in Dresdner Bank to build a global ‘citibank’ - type capability.

These are the big change-drivers. But such is the scale and pace of change that the more important ones may not yet be evident. What is clear, however, is that the art of managing under uncertainty is now the single most important competency. And for national and international regulation authorities, the words of Brian Quinn, formerly in charge of banking supervision at the Bank of England may not yet find a resonance: “Each night I say a prayer: please Lord send me a small - orderly - collapse” (Princeton, 1990)

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