M&A could help reduce cost base
The recent wave of consolidation in the industry is being driven partly by re/insurers acknowledging their high costs and attempting to reduce them, increasing profitability in the process, Matthew Wilken, president of Argo Re, told Baden-Baden Today.
“Our industry is a very high frictional cost industry,” Wilken said. Around 40 cents in the dollar is going into the process rather than the cost of the product itself, he explained. “Any industry where that is the cost of doing business is going to look for ways to optimise,” he said.
One way to achieve this is a focus on greater scale, which explains the current wave of mergers and acquisitions (M&A) the market is experiencing, Wilken said. In addition, efforts to innovate can help drive down costs by deploying assets to invest in ways to do business that are cheaper, faster and generally more efficient, he noted.
Argo acquired Ariel Re in 2017 in a deal that has boosted the group’s scale particularly in the reinsurance space, Wilken said. Scale was not the primary driver for the transaction, but the ability to reinforce the ability to innovate, having state-of-the-art systems, high-calibre individuals, and access to sophisticated third-party capital opportunities, he explained.
The Ariel Re acquisition has also given Argo a strong position at Lloyd’s.
“One of the challenges we have recognised in the past was that customers will go where prices are most effective and where the security is best. We need to be able to offer the customers the flexibility of paper whether it be in Bermuda or in London,” Wilken explained.
Lloyd’s is itself undergoing a profitability review in order to improve market performance.
“We are in a marketplace that is not making enough money. Competition seems to be rising, and expense challenges are manifest.
“As a result, tough action needs to be taken in difficult markets in order to ensure longevity and professionalism and profitability. Lloyd’s has grasped that,” Wilken said.
The performance review is likely to force some underperforming syndicates to stop trading, but strategically, Lloyd’s is doing the right thing, he noted.
“It is aiming to create a healthier, leaner market that strives for profitability that is measured in an empirical way.”
