How Will the Consolidation of Insurance Markets Affect You?
- Market consolidation dominated the insurance industry last year, and all signs suggest that this trend toward consolidation will continue.
- For insurance buyers, it is important to understand how these mergers may affect your insurance program and how to best manage your risk going forward. Insureds must be vigilant to ensure that their coverage is not negatively impacted.
Market consolidation dominated the insurance industry last year, and all signs suggest that this trend toward consolidation will continue. One of the largest mergers involves ACE Limited, which announced in July 2015 that it would acquire The Chubb Corporation for $29.7 billion. The deal is expected to close on January 14, 2016.
Other mergers that occurred or were announced in the past year include:
- Tokio Marine Holdings acquired HCC Insurance Holdings
- XL acquired Catlin
- Fosun acquired Meadowbrook and the remaining portion of Ironshore
- Endurance Specialty Holdings acquired Montpelier Re
- Exor is acquiring PartnerRe
As an insurance buyer, it is important to understand how these mergers may affect your insurance program and how to best manage your risk going forward. The following are some of the many issues you should consider.
Impact on Limits
Perhaps the most immediate and obvious impact a merger may have on your insurance program is the amount of limit that the combined company will be willing to offer going forward. For example, if you have both the acquiring and the acquired insurer on your D&O insurance program with limits of $10 million each, will the combined company be willing to offer $20 million of coverage going forward, or will one of the layers need to be absorbed by another insurer?
The answer to this question can be significant for insureds. For example, a new insurance partner may require a new warranty statement or add a new continuity date. The new insurance partner may also have different terms and conditions in its policy form, which could result in gaps in the coverage.
Impact on Structure
Mergers may also impact the structure of an insurance tower. For example, the acquiring insurer may decide to use its policy forms going forward (as opposed to using the acquired insurer's forms), leaving an insured with potentially different terms and conditions of coverage after the merger.
The newly merged company may also want to ventilate its exposure so that it does not have two layers of coverage right next to each other. Moving layers around in a program may lead to gaps in coverage and/or changed continuity dates for insureds.
For D&O insurance programs in particular, having the same insurer in the primary position and the lead Side A position may also create some concern. This is true even if the combined insurer continues to use the same policy forms after the merger. Insureds should be careful to understand the potential risks and benefits that may result if a merger results in one insurer taking both of those positions.
To be clear, having the same insurer in the primary and lead Side A position can be advantageous in many cases – if the program is properly negotiated. Insureds are well advised to consult with an insurance professional on this issue to fully understand the potential impact this may have on their protection.
Impact on Rates/Pricing
Even if a merger does not impact your limits or structure, it may impact pricing. Less competition in the marketplace can lead to increases to premiums.
In addition, even before this latest rash of mergers, only a few insurers could credibly write a primary D&O policy for a large public company. There are fewer now. Although it is still too early to know exactly how this may impact rates, it is safe to say that it will make it harder to place difficult risks.
Change in Culture (Underwriting and Claims Handling)
Mergers can have a significant impact on personnel and the culture of the acquired company. Insureds should question how the merger may impact the underwriting and claims philosophies of the going forward company. Some of the acquiring companies have indicated that they plan to act as a holding company and say that not much will change. Others have made it clear that the companies will merge operations. It is important to know if and how this could impact you as an insured.
Impact on People
As with most mergers, it is reasonable to expect that there will be some employees who are promoted and some who are terminated as a result of the merger. Either situation could impact longstanding relationships with insureds.
Impact on Innovation
Mergers may also have an impact on innovation in the marketplace. Factors such as less competition, increasing pricing, changing personnel and general distractions while working out merger details can dramatically impact the ability of new ideas to get developed.
As market consolidation continues, insureds need to be vigilant to ensure that their coverage is not negatively impacted. On the plus side, mergers may also open up some new opportunities to expand coverage. Insureds should work with experienced insurance advisors and brokers to make sure that they minimize any potential negative impacts a merger may have on their insurance programs.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.