October 21st, 2013

Increasing Strategic Advisory Needs of Large European Insurers and Reinsurers

Posted at 1:00 AM ET

paire_eric_thumbEric Paire, Head of Global Partners & Strategic Development EMEA


Major European international insurance companies face common challenges, issues and external constraints on their way to profitable growth. How can external strategic advice help through the process?

A Difficult Environment

Beyond the current, difficult macroeconomic environment, including sovereign debt issue and prolonged period of low interest rates, we see a longer term pattern: the end of an era where governments used to offer protection for healthcare, longevity and inflation. The reduction of government involvement and the corresponding increased role of the private insurance sector create a new paradigm, with little prospect to come back to the “old world.”

At the same time, investors’ increased focus on balance sheet strength, reduced volatility and solid dividend distribution capability put risk and capital management at the top of management’s agenda. Regulatory uncertainty around Solvency II is adding a level of complexity in mid- to long-term planning.

Which Areas Need Strategic Advisory?

With the implementation of risk based capital models (whether they be regulatory models as in the United Kingdom, Switzerland and maybe soon, the rest of Europe, or internal economic models) risk and capital are now closely linked. An insurer or a reinsurer cannot have a proper thought process on capital deployment without a proper strategy on risk appetite and risk transfer.

This applies on the asset side through the investment policy and on the liability side through underwriting policy and reinsurance strategy. It also includes how risk is channeled within the group (internal reinsurance vehicles) and how life and property/casualty risks are diversified.

Growing the business is also a challenge when most competitors have very similar growth targets and tend to focus on the same markets. Should capital be optimized to please shareholders in the short term or deployed with questionable long term profit perspective? The current influx of capital from pension funds and hedge funds is making these choices even more difficult.

Is There a Need for External Strategic Advisory?

Many of the big European companies have plenty of internal resources, including dedicated “corporate strategy” teams, alongside well-staffed risk management and finance departments. Why would they add an external advisor?

Management consultant Peter Drucker said: “The greatest danger in times of turbulence is not the turbulence. It is to act with yesterday’s logic.” A good external strategic advisor provides up to date thinking based on analysis of current market trends. He also challenges “obvious” assumptions and looks at the company from the perspective of regulators, rating agencies, investors and analysts.

Also, by bringing more and more services in house, including risk management, reinsurance or even mergers and acquisitions, companies tend to lose contact with what their peers and competitors are doing.

Who Should Be Your Strategic Advisor?

European insurers tend to consider transactions, financial or reinsurance, as separate from advisory and use banks and reinsurance brokers for the former, and consultancy firms for the latter.

But as they look at capital optimization in particular, they have experienced the benefit of using the advisory division of a reinsurance broker. With sophisticated modeling and benchmarking capabilities, reinsurance brokers are perfectly equipped to advise on risk, capital, earnings and dividend flows. The few, like Guy Carpenter, who have gone a few steps further, including in their toolboxes expertise in life and pension insurance, business intelligence, rating advisory and (through appropriately licensed group sister companies) investment advisory, can offer the broad spectrum of advice often requested by large European groups.

For those not willing to sail through these times of turbulence “with yesterday’s logic,” it is probably time to ask for some external strategic advice, in particular from your trusted broker.

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