The most adaptable will survive, not the T.Rex

Pressure on revenues and margins combined with the rise in mergers & acquisitions (M&A) in the industry has led to an increase in the need for specialist outsourcing services including operational consulting, or audit and compliance.

That is the recent experience of Artur Niemczewski, chief executive of Pro, a service provider focused on the insurance and reinsurance industries. “Certainly we see a rapidly growing interest in Pro’s services,” he said. “This is driven not just by the M&A, but by the overall pressure on revenues and margins.”

He said a key talking point in Baden-Baden will be less pure M&A and its implications and more how companies can achieve attractive returns on capital, given the dramatic increase in capital being deployed in the reinsurance and insurance sector.

“M&A is only a part of it,” Niemczewski said. “To paraphrase Darwin, it is the most adaptable who survive, not the Tyrannosaurus rex. Our industry is fundamentally different from how it was 10 years ago. The meteor has landed in the form of oversupply of capital accepting lower returns for higher risks.

The question now is: are you going to be the dinosaur or the mammal?”

He said that M&A is one way of seeking competitive advantage through economies of scale, hence the increased merger activity.

Other forms of competitive advantage include product innovation, increased client value and loyalty, or superior risk:return underwriting.

“Our job at Pro is to help our clients to be the most adaptable and be successful for the future,” he said.

Where M&A does take place, companies need to be aware of the pitfalls around regulatory issues. “Step one is always a regulatory approval of the deal itself,” Niemczewski said. “Step two, though, and a key value driver, is achieving capital efficiency. This is both a regulatory and a rating agency issue.

“Pre-merger the firms might have been using different solvency models. Inevitably the merger synergies include capital release or redeployment where there is an improved diversification between combined books of business. The regulatory case needs to be compelling, however, and make the best use of the solvency calculations.

“Merged companies often also re-examine their portfolios, and a sale of a non-core portfolio might release significant amounts of capital, which can be redeployed for growth. The Pro team specialises in particular in helping companies identify non-core legacy books of business and extracting value from these.”