The whirlwind of insurer-consolidation that has hit the insurance market over the past decade is not succeeding in creating shareholder value, nor is it improving customer service, Arthur Andersen partner Mark Ward claimed last week.
Speaking as a panel member at the CII's “hot topic” seminar, Ward said that insurers' desperation to gain access to capital via mergers had caused the market to be over-capitalised, reducing returns for shareholders.
He said: “There is little evidence that merged entities are more efficient. There has been an awful lot of M&A activity in the insurance sector and all the panel members realise this will increase. But the reality is that many insurance companies are over-capitalised, which has the knock-on effect of reducing returns. There is increasing scepticism as to whether M&As really work.”
Instead, Ward said, insurers should look to develop core competencies such as distribution channel management and outsource much more than they do at present.
Ward claimed that areas such as risk management, claims handling and internal audit should all be outsourced far more than they are now.
“Insurers are asking increasingly detailed questions about how a merged entity will deliver shareholder value,” he said.
Ward's comments were brave, considering they came in front of Bob Scott boss of newly-merged insurer CGNU, Bob Mendelsohn chief executive of insurer-giant Royal & Sunalliance, and Dennis Mahoney, group chief executive of Aon, the other panel members.
But Aon boss Mahoney claimed the rate of consolidation would continue remorselessly and for the foreseeable future because firms required international solutions to their problems.
“At the moment, $6 trillion out of the world's global economy of $28 trillion is globally controlled. Within 30 years it is estimated that four-fifths of the world's economy will be globally controlled,” he said. “Mergers continue not only in our industry but in every other industry. Global customers expect global brokers who are present everywhere. That global movement is just beginning.”
Mendelsohn added: “There is a global standard of being the best that is being evolved – if there is one underlying fact about the electronic age, it is that customers are going to demand world-class standards even when they are local customers.” He reckoned the UK would only pick up bronze in an insurance Olympics.
Scott said the insurance industry needed to focus on ecommerce: “The overwhelming view is that this is going to have a significant effect way beyond business to business.”
