Solvency II: A Driver for Mergers and Acquisitions?

Abstract

The European insurance industry is awaiting the new EU-wide harmonised Solvency II framework. Before its introduction, it is important to find out which incentive effects can arise from it. Practitioners predict a trend towards consolidation in the insurance sector due to recognition of geographic diversification effects in Solvency II's standard formula. This paper studies whether the new European regulation standards will constitute a driver for mergers and acquisitions in the non-life insurance sector. We identify situations in which consolidation becomes profitable. Our results indicate that the Solvency II framework may lead to an enhanced geographic restructuring wave. However, the profitability of this restructuring depends strongly on the correct estimation of costs and the characteristics of the consolidation partner chosen.

Recent trends in the study of merges and acquisitions

“…The infl uence of the development of the insurance market upon the hospital merger wave in the 1990s is evaluated by [30]. Waves of consolidation are also assessed in the insurance sector alone (see, for example, [34]). Mergers and acquisitions are expected to happen in order Finance to restructure and consolidate the European insurance sector after the harmonized Solvency II framework that is about to be put into practice.…”

Diversification and Solvency II: the capital effect of portfolio swaps on non-life insurers

“…Many practitioners and researchers have predicted that Solvency II could foster merger and acquisition (M&A) activities across the insurance sector. Stoyanova and Gründl (2014) provide empirical evidence that Solvency II could evoke a wave of M&As within the European non-life insurance sector. The authors applied a theoretical model to assess an insurer's decision to consolidate based on input factors such as the costs associated with the M&A, the SCR calculation method post-merger, the riskiness of an insurer's business, and the size of the merging insurers.…”