Despite the sense of near-term urgency, insurers are already thinking about the long-term implications. In many ways, the COVID-19 pandemic will accelerate trends already underway. That is likely to be true of ongoing industry consolidation and other mergers and acquisitions (M&A) activity.The COVID-19 crisis by itself will not trigger significant levels of M&A activity during the short to medium term. However, the pandemic is intensifying the spotlight on the same structural weaknesses in the insurance sector that have driven consolidation and other M&A activity in recent years. As such, the crisis could accelerate underlying M&A trends, including consolidation.
Large-scale transactions are possible, although the difficulties in executing deals during uncertain times are not to be underestimated: those challenges range from the need for clear messaging to customers, regulators and other stakeholders, to the complexity of making decisions when many variables are unknown.
What should Insurers be doing about M&A in 2020?
Global insurers may prepare for projected economic, interest rate, and financial market uncertainty by building or strengthening their M&A muscles to better prepare for either acquisitions or divestitures. This exercise should include aligning strategic business initiatives and capabilities with potential market opportunities, as well as due diligence to reach out proactively to potential targets and show interest before others enter the arena.
Insurers should strive to become nimble enough to capture optimum opportunities as soon as they present themselves. Insurers can also re-examine M&A corporate development and integration capabilities to establish a more efficient and effective screening discipline for their decision-making process. Utilizing tools and playbooks such as Digital Deal Room, and M&A Central may enable more advanced digital and analytics capabilities throughout the M&A life cycle.
Only 4 percent of millennials are interested in working for the insurance industry. A preference for the technology industry, generally negative perception about working in insurance, and lack of knowledge about how the industry functions are among the obstacles most carriers face in attracting new talent.
Impact of the crisis on M&A activity
In the short term, M&A activity will be very heavily constrained, not least because of the extreme difficulty of valuing assets when the economic outlook, the future behavior of customers, and the timing of recovery are all uncertain. However, we see several drivers of M&A as the sector starts to move beyond the “now” and into the “next and beyond.” (EY uses the “now, next, beyond” framework to consider the impact of societal, macroeconomic and technology trends on various industries and how companies should prioritize their action plans.)
Increased M&A activity in recent years has been a result of the ongoing transformation in the industry:
- Disposal of legacy and non-core insurance businesses and portfolios. This has led to the rise of specialist consolidation vehicles that can achieve the expense and capital synergies required to manage such legacy business on an economic basis
- Sector consolidation, driven in large part by insurers’ realization that companies with greater scale and the ability to invest in digital capabilities and new value propositions, have an advantage
- The rise of new insurance ecosystems and recognition that future propositions and distribution routes will involve collaboration across current and emerging value chains
Insurance brokers are likely to experience greater liquidity stress than insurance underwriters, largely due to brokers’ lower levels of cash reserves. In some segments, the financial position of brokers could be hurt by major insurers’ actions to demonstrate fair treatment of customers (e.g., premium rebates and premium holidays). There is, therefore, a risk of unintended consequences; actions taken by insurers or other industry participants could tip other companies into financial distress. Of course, stronger brokers may see an opportunity for acquisition or consolidation. Other investors (including private equity) are positioned to bring needed liquidity and capital to struggling companies.
Impact of the crisis on the M&A assessment process for insurers
Lessons learned during the COVID-19 crisis will affect the nature of M&A activity for years to come. As they evaluate acquisition targets, insurers will focus on:
- Operational resilience: When assessing targets in the future, insurers will focus on how their systems and processes reacted during the crisis. Insurers will be wary of taking on any business that presents risks to the resilience of the overall operational environment.
- Social purpose: The insurance sector’s role in society has become a hot topic among industry leaders and in the media. Environmental, social and governance (ESG) criteria have increasingly informed investment strategies and decision-making – a trend likely to accelerate in the COVID-19 aftermath. Similarly, communicating and demonstrating the industry’s social purpose will feature heavily in due diligence of acquisition targets and in investment decisions.
- Product innovation: As with a clearer social purpose, product innovation will become more important. Specifically, insurers will be under pressure to re-design products to make them more applicable and adaptable to emerging risks, such as pandemics and threats related to climate change. Thus, we expect the ability to innovate to be a top criterion as insurers evaluate acquisition targets, at least as much as historical product sets.
- Scenario analysis: Assessing business plans with any degree of confidence is going to be much more difficult given the wider economic impact of the crisis. While the uncertainty will decrease over time, acquirers will need more robust and sophisticated scenario modelling capabilities. That means developing and analysing scenarios that incorporate downside risk in conjunction with primary “base case” valuations.
- Workforce flexibility: The COVID-19 crisis has tested workforce flexibility in ways never previously imagined. As a result, human resources due diligence will move to the centre of M&A decision-making.
Insurance M&A deals are an ongoing process for companies that do it well. It requires laying groundwork today to be ready to act on opportunities tomorrow—especially when pursuing profitable growth in a challenging environment.For more on these insurance M&A drivers and trends, download the 2020 insurance M&A outlook. Our report focuses primarily on conditions and activity in the United States and Bermuda, and we’ve also included an appendix with snapshots of M&A activity in several other global markets.
While M&A activity is to be expected as the sector emerges from the current crisis, we expect the lessons learned during the industry’s response will profoundly change how insurance executives assess M&A transactions in the future and the nature of the entire deal process.