25 October 2015 News

Merger the new normal for Munich Re America

Merger mania will continue to be a principal reinsurance industry driver for the next several years, Steve Levy, the president of the reinsurance division at Munich Reinsurance America, told PCI Today.

He believes that a convergence of key factors have combined to produce an environment where the only course of action for smaller players will be to seek scale through merger.

This will be disruptive for those firms that are considered to be part of the merger merry-go-round but ultimately will prove to be a good thing for the industry.

“We expect that mergers and acquisitions (M&A) activity will continue for several years. It is a consequence of the high level of capitalisation in both the primary and reinsurance sectors, in a relatively low growth environment,” Levy said.

“Within the reinsurance sector consolidation is going on mainly among smaller companies, so there will probably be stronger market players in the future. This will have less of an impact in the short term, but in the medium term it may result in greater price stability and hence be good for the market.”

Overcapacity has affected both supply and demand as the capital position of primary insurers and reinsurers has been boosted by benign loss experience, decreased inflation and lower interest rates.

“This has resulted in higher retention ratios on the part of cedants as they have elected to retain more risks due to their good capitalisation. At the same time, reinsurers are able to provide ample capacity as their capital has also steadily increased thanks to strong results over the last few years. In addition, new capital has been entering the market.

“The combined effect of all this is the sharp reinsurance price decreases in recent years,” Levy said, adding that Munich Re “was better prepared than others to cope with the demands the new environment presented”.

“This market situation helps explain why disciplined cycle management is central for Munich Re as it enables us to better maintain our profit margins. The good news is that we have seen reinsurance price pressures easing in recent renewals,” he said.

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