Insurers fall into each other's arms

As the reporting season gets under way, a flurry of merger and acquisition activity has taken hold in the insurance industry, with targets large and small coming under scrutiny from rivals. What are the roots of this buzz and what could it mean for consumers?

Which companies are talked about as targets or acquirers?

Friends Provident and Resolution have been angling for an £8bn merger for months, but several other bidders have hung around eager to spoil the party. In particular, Hugh Osmond's Pearl Group looks keen to acquire Resolution, founded by his arch-rival Clive Cowdrey. Zurich Financial Services, meanwhile, is waiting in the wings and is touted to be ready to snap up Friends Provident if other deals fall through. French insurer Axa has potential designs on Friends, since it already owns shares in the company and could fancy expanding into the UK.

Abbey Life has been offered for sale by its owner Lloyds TSB, with Deutsche Bank, Resolution, Pearl and Swiss Re all understood to be bidding. Legal & General has also been tipped as an acquisition target, and Prudential – which announced mixed results (good in Asia, reasonable in the US but patchy in the UK) last week – may come under renewed pressure to sell underperforming assets, with Aviva mentioned as a potential suitor.

Royal and SunAlliance might also be in the mood to go on the acquisition trail: the company announces results this week, and analysts are expecting earnings to have doubled.

What's behind all this?

Last month the European Union announced radical new laws, known as Solvency II, to determine how much capital insurers have to hold to match the risks they face. For the large companies, this is likely to mean they can free up billions of euros in capital, since they are highly diversified and have consequently lower risk. They could, then, spend this extra cash on acquisitions.Mid-sized companies, however, may need to merge with one another to comply with Solvency II.

Industry experts like the thinking behind the legislation since it removes a mass of red tape from much of the scene for cross-border European insurance transactions, and avoids duplication of supervisory duties. The increasing ease of working across different European states is in itself a motive to acquire companies in other countries as a means of expansion.

Are there any other motivations?

The insurance industry faces a period of upheaval, with unpredictable factors such as terrorism and climate change posing increasingly high risks.

Meanwhile, losses resulting from the recent UK floods are estimated to have cost the industry around £1bn, which contributed to Norwich Union's announcement last week that premiums for home insurance would rise by 10 per cent.

Future weather-related events could well be still more severe and the industry is now taking the issue of climate change increasingly seriously. To offer protection against potentially massive losses from flooding, for example, companies will clearly be better equipped the larger they are.

Increased competition and resulting lower margins across the industry have also pushed companies into one another's arms, alongside a need to grow internationally to exploit new opportunities and move away from the saturated Western European markets. Finally, a host of new distribution channels, from websites to mobile phones, and new competitors such as supermarkets, have increased the pressure on traditional insurance companies and made them more likely to consolidate to share expertise and gain from economies of scale.

Private equity firms have been homing in on insurers as they take on ever larger fish, but rising interest rates could curb this movement.

What does it mean for me?

Many people in the UK will have been alarmed by the extent of the flood damage in July, reaching areas previously not thought to have been at risk. Insurers are alert to the opportunities here, so expect to see more advertising for climate-related deals.

More cross-border M&A, meanwhile, will mean you could be offered insurance from a company based in Spain, Germany or France soon – the location of the company will matter less and less – and checking online price- comparison sites will increasingly allow you to select the best deal for your personal circumstances, across a great range of products. Ideally, this added transparency and higher levels of competition should mean lower premiums for customers, though you shouldn't hold your breath for these.