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European insurers reconsider expansion.

European Insurers Reconsider Expansion

Deregulation of insurance in Europe always meant intensified competition for customers; that was part of the purpose of 1992's freedom of services. Less obvious was that this goal would result in a battle for control of insurance companies, with the predators playing out their strategy of developing market share through mergers and acquisitions. Now the unforeseen consequences of this strategy are coming to light.

In the absence of a truly European market, which is not to take effect until after 1992, there can be no such entity as a "European" insurer. Yet at the same time, it takes a truly national company to run a pan-European insurance organization. Simply stated, a European insurer seeking to expand in Europe would run up against most--if not all--of the problems that a U.S.-based insurer would find there.

In a European market that is borderless and has common rules, regulations and prices, the concept of a national company operating across Europe would in fact have no significance. It would be of no significance to mention whether a company is based in France, Italy or Germany, since no matter where it is located, it is operating under the same rules and regulations. For instance, there is no point referring to General Accident as a Scottish company because its head office happens to be in Perth, Scotland. The company is free to operate across the United Kingdom.

How European national companies are expanding from "home" is instructive. While success may depend on the solid home base of national companies, it also depends upon acquiring strong companies in other countries.

Strangely, Europe's 1992 so-called freedom of services has stimulated various forms of expansionist activity characteristic of countries where markets are not free and without barriers. It is easy for BMW to sell cars in the United Kingdom and other European countries because a well-made car is a well-made car anywhere. Yet the same does not hold true for an insurance policy because insurance products closely reflect the laws, regulations and traditions of the country. Hence, there is a overriding need in the insurance industry to operate through local companies which are in touch with buyers and know the indigenous laws and regulations.

The drive to quickly become a familiar name to consumers and business people reinforces the need for insurers to expand across Europe via mergers and acquisitions. Partnerships, pools and cooperation agreements have proven to be inherently unsatisfactory and tend to break up, as recently demonstrated by Willis Faber and Johnson & Higgins.

But is the acquisition route as sound as it looks? The shareholders of companies spending furiously as they buy and merge with other companies have begun to ask questions and have then even persuaded their boards to start selling off assets. The reasoning here is that large conglomerates are difficult to manage, and the prices paid for acquisitions often prove to be high in retrospect. Moreover, insurance is not an industry in which the principle of "economies of scale," beyond a certain level, plays a major role. It has always been relatively easy for new players to enter the market and exceed their target goals.

At a recent conference, Michael Butt, chairman of the British company Eagle Star, put forth his view of the difficulties European companies face: "Given that to set up a distribution network is time-consuming and, in many cases, prohibitively expensive, the practical option is to acquire, merge or set up a joint venture with an existing company that already possesses a consumer franchise," he explained. "Here we run into the twin difficulties of short supply: There is only a limited choice of available partners and defenses against interlopers."

As for the barriers to restructuring, Mr. Butt said that despite the EC's establishment of a unified regime for mergers and acquisitions, "local cultures and rules will continue to determine the extent to which the market in companies operates."

He said the extravagant takeover bids are inevitable, but the so-called 1992 premium seems to have gotten out of hand. If companies looking to acquire are willing to pay top dollar, "then they are either so desperate for a strategic presence that they will pay any price or the underlying stock market is so inefficient as to render its value meaningless."

Mr. Butt warned against the temptation to get from point A to point B at all cost. Yet by this same token, those firms which try at all costs may actually get somewhere, whereas those which remain static, pondering the difficulties, risk never getting anywhere.

Chris F. Best is editor of Foresight, a London-based insurance and risk management journal published by Risk and Insurance Group Ltd.
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Title Annotation:London Perspective
Author:Best, Chris F.
Publication:Risk Management
Article Type:column
Date:Oct 1, 1991
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