M&A In The Global Insurance Industry

The multi-trillion-dollar insurance market has seen strong growth in recent years, which can be attributed to several factors. Among these growth drivers are the globalization of insurance services, demographic changes, aging populations, shifts in consumer behaviors, the expansion of distribution channels, digital transformation, emphasis on cyber insurance, population health management, and climate change and environmental risks.

KEY TRENDS

Major trends in the insurance industry include Insurtech collaboration, personalization through artificial intelligence (AI), blockchain for efficiency, customer-centric digital experiences, ecosystem partnerships, and regulatory technology (aka: regtech).

Risk assessment capabilities are more important than ever, and insurance companies will need to employ data analytics to address rising risks and implications of extreme weather events, economic uncertainty, and technological advancements.

Climate change directly impacts the insurance sector with systemic physical and transition risks. While the weather cannot be controlled, insurers can take steps to develop a better understanding of how to address them within their portfolios, rebuild risk models and pricing, create new products and services, and work with organizations to help mitigate risks.

Insurers will also benefit from investing in advanced technologies and replacing legacy systems in order to improve efficiency and adapt to evolving risks and customer needs.

They must embrace digital solutions, the use of data, and responsible AI for products, pricing, and consumer engagement. Those who can innovate and adapt quickly will be among the industry’s most competitive players.

M&A

Mergers and acquisitions in the global insurance industry carry their share of unique challenges, yet the insurance sector remains attractive to investors, with M&A activity showing resilience compared to broader market declines. There is always the potential for increased regulation, and ever-changing technologies and infrastructures can make it expensive and difficult for companies to keep pace.

M&A activity in the global insurance sector has become more dynamic as a result of several contributing factors and strategic objectives.

• Companies acknowledge the need for economies of scale and seek to expand by moving into global markets.
• Lower policy rates push industry players to consolidate to maintain profitability and find ways to remain competitive by uniting two synergistic companies and gaining more value through scale efficiencies.
• Stagnant domestic markets result in cross-border targets.
• Organic growth cannot be relied upon to meet company goals.
• Heightened interest comes from a broad range of backers, from hedge funds to international investors.
• Low profitability results in low investment yields.
• Insurers need ways to spend large cash reserves.
• They need to integrate new technologies (such as mobile apps and big data) to revitalize flat business models, improve internal capabilities, reach customers, or gain market insights.

As with all M&A transactions, meticulous due diligence in the insurance industry is critical to a successful deal. While many due diligence topics for an insurance company overlap with that of all types of M&A transactions (property, tax records, employee issues, etc.), the insurance industry is subject to some unique scrutiny, such as:

• Regulatory issues (licensing, permitted practices, regulatory filings, and interactions with government agencies)
• Assessment and adequacy of reserves
• Structure of investment portfolio
• Underwriting and claims administration
• Market conduct and producers
• Reinsurance collectability
• Intercompany agreements
• Data security
• Compliance with privacy laws

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Crafting the purchase agreement in insurance M&A transactions is also an important part of the process. If done correctly, it will address both the unique nature of insurance companies and the regulatory environment in which they operate.

Insurance-Specific Indemnities

Indemnification provisions within insurance M&A agreements are similar to those of other industries, except for a few differences. An M&A transaction can call for unlimited indemnity protection for specific circumstances in which the buyer asks the seller to assume the risk. Common areas for specific indemnities include:

• Policyholder claims for extra-contractual obligations or claims that exceed policy limits
• Litigation specific to the insurance industry (i.e., class action policyholder lawsuits or regulatory actions for improper business conduct)

Cultural Integration in M&A

Global insurance executives have reported that overcoming cultural and organizational differences following a deal has been a significant challenge.

For cross-border M&A to be successful, leaders must look beyond financial motivations and consider how cultural integration can result in improved synergy and innovation. This can happen in several ways:

• The acquirer can completely assimilate the culture of the target company.
• The acquired company can maintain its own identity and independence.
• The two can meld, creating an entirely new culture.

The route a company chooses to take depends on the size of the two companies, the post-deal organizational structure, and the advantages generated by different cultural traits.

When companies carefully consider culture, they can greatly benefit from the positive outcomes and lower the risk of failure in M&A. A cultural assessment should be conducted alongside due diligence far before the deal nears completion. This assessment should study both companies' geographic locations, management styles, work habits, and attitudes. Successfully uniting employees from diverse backgrounds calls for a customized process that should not be rushed and includes clear and honest communication.

Steps for Success

When insurance companies are considering M&A for financial growth, geographic expansion, and bolstered competitiveness, there are certain steps that leadership should take to find the right type of deal and ensure a positive outcome.

• Assess the future of the industry, the trajectory of the business, and where the two align.
• Plan for different scenarios that could trigger economic changes in the next one to two years.
• Craft an M&A strategy that aligns with ownership’s goals.
• Choose target companies consistent with leadership’s overall strategy and long-term goals. What seems like a good idea today may not make sense for five to ten years down the road. 
• Remain cognizant of the changing tax and regulatory environments.
• Evaluate in-house corporate development and overall integration abilities.

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If you are ready to grow your company, sell your company, find a new investment opportunity, or plan your exit strategy for retirement, give us a call at Benchmark International. Our esteemed M&A advisors will craft strategies that deliver outstanding results for your plans for the future. 

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