By Andrew Holderness of Clyde & Co
Acquisitions aplenty
Without doubt, 2015 will go down as the year of the insurance transaction. There has been a deluge of deals over the last 12 months and the signs are that this will continue into 2016, with a number of markets in particular to watch out for.
While inbound investment into China is likely to remain steady, there will be a surge in Chinese insurers moving into or strengthening their positions in overseas markets around the world – particularly in more mature markets. Following the lifting of restrictions on the yuan being used for foreign investment, a number of Chinese firms – most notably Fosun and Anbang – have been actively seeking the acquisition of overseas insurance assets, in a trend that is set to accelerate in the coming year.
Meanwhile, in the Middle East, M&A activity will also accelerate in 2016. The United Arab Emirates has introduced a risk-based capital model that will require the implementation of a raft of new systems and processes in order to ensure compliance. These changes will come attached with a significant cost which many of the smaller players – whose profit margins are slim – will likely be unable to afford. The net result will be forced consolidation in the industry.
At the same time, the regulator has suggested that there is a strong possibility that foreign investment limit – currently capped at 25% - may be raised to 49% in the near future. Elsewhere in the Gulf Cooperation Council similar legislative changes are in the pipeline with foreign insurers looking to strengthen their position in the region as a result.
New rules
Whether it’s accompanied by a loud cheer or a collective sigh of relief, Solvency II has finally come into force in Europe. We predict that it will act as a trigger for the legacy insurance market in mainland Europe. Many companies – especially medium or smaller insurers – will have to reconsider their business models in in light of the new regulations and assess what they mean for their business. The benefits of optimising the management of legacy business, or of organising the sale of certain books of business in run-off, will become more obvious in terms of capital requirements. This will translate into a greater focus on legacy business and an increase in the number of transactions in this field.
On the other side of the channel in the UK, the Bank of England Bill will be the starting gun for London as an insurance-linked securities (ILS) hub. Although the government has made significant steps towards enabling the UK to become a centre for ILS business, the devil will be in the detail. While the Bill will address the current lack of corporate structures most efficient for setting up insurance special purpose vehicles, which will form a critical part of the ILS arrangement, there are a range of issues that still need to be worked through, not least making the UK tax regime more attractive to ILS investors. We may see an interim role for London as an advisory or legal hub to nearby offshore domiciles, such as Malta and Gibraltar, similar to the role New York plays in supporting the ILS market in Bermuda.
Technology – a double edged sword
Insurers looking for growth opportunities will use technology as the key to unlock untapped markets such as South-East Asia and India as they find new and more effective ways to connect with potential customers. In markets characterised by high levels of competition, companies need to come up with disruptive, technology-based distribution channels, and new types of affinity arrangements with different distributors to try to deliver on their growth ambitions.
An increasing focus on various forms of online distribution is likely and this will bring with it greater regulatory issues and challenges, as geographical borders dissolve in the digital world and the traditional roles performed by market participants are changing. Web based aggregators are also challenging how insurers market and differentiate their products. Foreign insurers with greater experience of technological channels and e-platforms may have something of an advantage, but domestic players will move quickly not to get left behind.
Meanwhile, against a global backdrop of escalating cyber attacks, governments around the world are taking steps to ensure that organisations are properly protecting the data they hold. Organisations working in the insurance sector need to ensure that they are staying abreast of these changing regulatory developments. Companies will be expected to review their risk management frameworks and implement robust cyber policies and breach response plans with a view to mitigating loss.
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