Well done, Willis Towers Watson. It must feel good to be a really large company in the age of the insurance industry consolidation. WTW has arrived and is now, with a market capitalisation in excess of £8.5 billion, part of the mega company elite. With that comes dual opportunities to, as Artemis put it “become a risk and capital connector in re/insurance and ILS” and “for the firm to be bold and innovate” are theoretically potentially key justifications for the logic of the deal.
These things are easy to say, but the joint propositions are worth deeper analysis. Is there really value in WTW’s potential ability to connect even more capital with risk? Sure it can, but the reinsurance sector hardly needs more capital being already over-capitalised as reported most recently in the A.M. Best briefing http://www3.ambest.com/ambv/bestnews/presscontent.aspx?altsrc=14&refnum=23509
As Artemis points out, the influx of alternative capital and the growth of ILS and catastrophe bonds is here to stay, but in itself they don’t amount to disruption. They are alternative sources of capital to use to offset risk and a broker can’t claim to be innovative just because they can structure or access securities and bonds.
As a specialist reinsurance advisor myself, I can see from the front line that for all the talk of innovation and disruption the truth is that the community still seems to be living comfortably off (some more than others) and comfortable with the current one-dimensional quantitative space in which we contemplate whether it is still a soft market or already a bit harder than a year ago. In Europe, its Monte Carlo in September each year in which the reinsurance industry starts the guessing game as to which direction the reinsurance rates will move. It still too close to the holiday season though and it’s a month later in Baden-Baden that we get together for some more speed dating, but it starts to feel a bit more business like.
We listen to the top tier reinsurers tell us about a potential rate increases at 1/1 usually countered the brokers’ opposing view. Then from early November until the end of December it’s eight weeks of Groundhog Day. A break for the holiday season and then in early January we get the reports from the big three brokers that the rates went down by ten percent across various classes of business. Towards the end of February top tier reinsurers duly report several billion Euros of profit for the last financial year and the cycle is completed for another year - the reinsurance circle of life.
My bet is that come September 2016 we’ll start the circle all over again. A major catastrophe event may or may not move prices, but even if it does, will the next renewal feel fundamentally different?
It all feels a bit last century. A bit tired. It needs a breath of fresh air. Not another sidecar or a cat bond or hedge fund dressed up as a reinsurer. It’s not about the quantity, it’s about the quality. Innovation and disruption means genuinely new products which, for instance, help fight low insurance penetration in emerging markets or about distribution – the way reinsurance is transacted between the buyer and seller, or about the way the risk information is assessed and exchanged in the market. The list is long and I could go on. Overall it is down to how does the community make the most out of the abundance of accumulated knowledge and resource at its disposal in this digital age. To really address that issue together we have to stop worrying about not getting to another billion euros of profit next year and start some real innovation.
So, to my mind, the most interesting part of the Artemis article is at the very end. It poses the question whether WTW should be bold and disrupt its own brokerage model. The new company is perfectly positioned and has best in class resources to do so. Perhaps this is where reinsurance innovation could start, but it requires a recognition that we need to move on from the traditional relationship/commission based reinsurance from which the brokers get most benefit at present.
If, as Artemis contend, the full potential of the WTW deal arises from the firm being bold and innovative then they have to accept disruption from within and the threat that will bring them in the short term. Only time will tell whether WTW has got the courage to go for it. I for one, really hope they do.
The merger between insurance and reinsurance broker Willis Group and global professional services firm Towers Watson has officially completed today, with the newly joined 39,000 person company now having an interesting, perhaps compelling opportunity in re/insurance and ILS.