Industry consolidation – beneficial to the industry?

The South African financial services industry is currently facing a number of cost challenges which is affecting the way companies do business. In addition to the rising economic cost of doing business is the impending implementation of systems and processes to fully adhere to any new regulations.

While some companies are large enough to absorb potential additional costs, or implement mitigation strategies to cope with this, many companies do not have the capacity to do so. These companies are faced with two options: close shop or merge with larger companies.

With companies constantly seeking growth and profitability, what are the chances of seeing some more mergers amongst players in the insurance industry in 2014?

Regulation to be a key driver

This certainly is a possibility, taking into account an industry which has seen many regulatory changes over the last five years and an industry which will be impacted by even more regulation over the next few years. Capital requirements in Solvency and Asset Management, the new solvency initiative, could play a key role in bringing about mergers.

However, regulatory change will not be the only reason for consolidation. There is no doubt that the economic situation plays a significant part in mergers and acquisitions across all industries. A catalyst for consolidation and mergers is, among others, the need for expense management and cost reduction. It is therefore conceivable that mergers and acquisitions and further consolidation is a possibility. We are also seeing an improvement in the global economy leading to the availability of investments for acquisitions.

What does this mean for our industry?

We could possibly see more consolidation in the intermediary sector, particularly in the short-term sector as we have a convergence of administration houses capable of servicing groups of brokers via one system and a common set of service providers.

This will bring about serious advantage, an immediate reduction and removal of duplicate costs. This will assist in managing expenses and containing premiums because of the ability to leverage off a reduced, efficient cost base particularly with intermediaries who have binders and manage additional functions on behalf of insurers. Where income reduces to an extent that businesses no longer have a sustainable income, consolidation is a definite option and a solution.

Consolidation could also affect support services like those who provide technology to the intermediaries. With the introduction of Stride, insurance companies together with intermediaries will need to select partners who are compliant with the requirements of the regulator and as such this could influence the sustainability of those who are not compliant.

In general, service providers may look to expand their footprint, bring together specific expertise, thereby creating operational efficiencies and synergies leading to a cost effective solution via economies of scale.

Growth and new improved products

Mergers also have the ability to bring about new and improved products, particularly specialist products and service. Other companies looking to diversify or expand into niche markets and grow their income will also possibly look towards acquisitions to gain market share and, in the process, offer a better service and products. The pressure on pricing is also adding further reasoning to consolidate business which will, in itself, attract inorganic growth.

The strategic vision of companies in the insurance industry will ultimately dictate their appetite to grow their business, diversify into different fields or products that they see as core to their future operations and target markets. No doubt all of this will be against the
backdrop of improved client service and providing for the needs of the clients.

With this in mind, the value of the intermediary becomes significant in helping customers to manage their risk.