Too many underwriting shops?
Are there too many underwriting shops? Are there too many underwriting carriers and reinsurance companies, with too much capital behind them and competing for the same business?
The growth in capital since mid 19080’s to now is staggering, the classes of ’86, ’01, ’05 were all critical at the time, but we are seeing a trend of consolidation.
How do all these remaining competitors all meet their own return requirements and satisfy all stakeholders?
How many markets are needed behind the top 5 or 10 in each sector?
Are the industry returns sufficient to warrant the system as designed today?
With increasing pressure downward from capital and upward from technology disruptors, many are having a challenging time identifying ways to differentiate and provide real value added services.
Interesting questions, given the recent mergers and acquisitions activity the answer may show itself soon. Recent announcements and other articles have highlighted the challenges in the market. Hard markets of the past seem to be a thing of the future, alternative capital and speed of capital into the business has eliminated the “all boats rise in rising tides” approach.
For as long as the insurance industry has been around there has been consolidation and this will continue. Acquisitions are a nice strategy for growth.
This is not new news…What has been the delay in mergers and acquisitions activity?
Some would argue the executive compensation for the industry doesn’t align insurance industry executives for large M&A due to the small ownership interests in the organizations that they manage. The argument is these executives are incentivized by the status quo and keeping their annuity (salary, stock and dividends) vs. looking to sell firms and grow stock price through sale (not enough lifetime earnings).
The World is changing rapidly and executive teams need to be responsive. Boards will be shopping their firms, regardless of executive will. If you’re on an underwriting company board and haven’t shopped your company, time to start. Or look to set up your executive team compensation like Elon Musk at Tesla (might have unintended consequences for Risk bearer to be based solely upon market cap).
Taking underwriters private to Private firms in Insurance and reinsurance may also be a trend. Or direct investments by Pension funds and asset managers directly.
This consolidation will also have interesting effects for the volatility on the future firms when the $400B market event predicted by Warren Buffett in 2017 shareholder letter occurs.
The young industry professionals will be ready and positioned well to take on big leadership roles as synergies and consolidation play out. The talent drain of underwriters is significant through natural attrition and retirement. However, the rising stars in insurance and reinsurance will be the future, investors and executives should think about retention policies (compensation structures, responsibilities & knowledge) to retain and develop these underwriters for the future.
Change is coming to the industry, for those who are ready and prepared they will be well served. For those with company stock, they will also be well served with some of the premiums to book value or premiums to current stock price.