Editorial - overcapitalised or not?

Editorial - overcapitalised or not?

The latest AM Best briefing says that the "cultural barriers" that in the past might have hampered consolidation in the global reinsurance industry could become less of a factor "if companies shrink to where they can no longer compete in this increasingly global market". 

AM Best cited the Validus acquisition of Western World, the RenaissanceRe purchase of Platinum and, most recently, the XL takeover of Catlin.

The evidence of these three deals seems to be that those selling up have the upper hand. In all cases the price paid could be described as "healthy", or "full" or "quite a lot", depending on your take on future prospects. For an industry where the newly created listed reinsurers since 2005 have nearly always failed to rise above book value, the buyers of reinsurers seem perfectly willing to bet on future prospects to justify the price paid.

There seems little doubt that the major driver in the new world of consolidation is defensive rather than opportunistic. Is it "expand or die"? Probably not. But there is little doubt that the smaller players that remain will need to be niche operatives in areas that have not seen their margins smashed to pieces by new capital.

AM Best takes as a given in its opening sentence a statement that is no longer universally accepted. "The global reinsurance sector remains by all accounts overcapitalised". But this is not the modernist way of tinking among reinsurers. The line now is not that there is too much capital, but that the capital available is not linking up sufficiently efficiently with the risks that are out there. It is not so much that the reinsurance industry overcapitalised as the world is underinsured.

It is here that the smaller players are at a disadvantage; exploiting new areas of risk rather than relying on established ones such as Atlantic Hurricane property-catastrophe requires research and development, the negotiating of local rules and regulations, and global scale. Consolidation, therefore, could be seen as a move driven by a need for scale than a need to reduce the total amount of capital in the reinsurance industry.

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March 2018

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