Is now the time for an insurtech acquisition spree?
Recent years have seen a number of challenges to the global economy – COVID-19 and the war in Ukraine being the two biggest – but nothing seemed to slow the pace of M&A activity in the insurance market. Many countries are now battling inflation, which has caused a noticeable drop in activity, but even inflation will lead to opportunities, most notably to acquire businesses at potentially discounted prices.
The deal boom's origins lie in the aftermath of the financial crisis, with low interest rates leading to investors turning to alternative investments. There has been a notable increase in M&A activity involving insurers and intermediaries since 2008, driven by an increased level of investment by private equity firms in the insurance market. The number of deals in the sector has remained strong during this period: global insurance deal volume rose around 3% from 2020 to 2021 from an already elevated position.
Intermediaries have proven particularly attractive to private equity, as the commission they generate offers predictable, regular and immediate income without the need to deposit high levels of capital to support the business, as would be required with a (re)insurer. A major feature in the intermediary acquisition spree has been the consolidation of intermediaries, with a number of private equity-backed intermediaries scaling up through acquisitions carried out on a wide scale and at pace. In the space of three years, one such intermediary completed over 15 acquisitions, and quintupled its profits.
Is insurtech funding drying up?
Investment in insurtechs came later, with the main surge occurring shortly before and during the COVID pandemic. Insurtechs were able to take advantage of relatively freely available funding, a state of affairs which has rapidly changed in the last year. There has been a marked drop in insurtech investment in this period, and a reduced appetite to lend to what in many cases are unprofitable businesses with no track record. This has led to numerous examples of insurtechs struggling to secure new rounds of funding. One obvious outcome is that many such insurtechs will fail, but their struggles will also make them ripe for an acquisition, potentially at a reduced price.
In the race to survive, we expect certain types of insurtechs to be more attractive than others. When the first wave of insurtechs arrived, they were greeted by predictions that traditional (re)insurers and intermediaries would be driven out of the market by these newcomers, or at least when Amazon, Google, Facebook, Apple and co subsequently entered the market.
However, the expectations of one-click insurance and of customers having claims paid instantly have not come to pass. Instead, insurtechs and other entrants to the market have discovered the relatively high barriers to entry, such as capital requirements, regulatory compliance, and regulatory scrutiny; "move quickly and break things" is no mantra for insurance.
What next for insurtechs?
The smart insurtechs have not attempted to take on the established players and completely transform how we buy insurance, but instead identified discrete areas for improvement, often in the 'back office' or in less glamorous parts of the distribution chain. Perhaps it should always have been obvious that technology providers would be best suited to combating out of date systems and inefficiencies, of which there were plenty in a market which ran solely on paper (or, probably apocryphally, the back of a napkin) for decades.
It is in these areas that insurtechs have arguably brought the greatest value to the market, and it is these insurtechs which are now well-positioned to be acquired as funding dries up. This is not least because their technology might prove attractive to, and applicable across, a private equity firm's wider portfolio.
One potential challenge to this prediction lies in elevated interest rates, which as mentioned above have caused deal volumes to fall recently: could we see private equity scaling back insurance, and specifically insurtech, investment as it turns back to traditional investments? It is certainly a possibility, especially with many intermediaries now reaching their second, third or fourth turns of private equity investment. Of course, there is only one way for this to happen: further deal activity. It seems that this lull will be a temporary blip and that we are most likely in for a continued run of M&A activity in the insurance market.
About the authors
Will Reddie is a Partner at HFW with experience including M&A and insurtech products, advising on issues across corporate, commercial and regulatory matters. Bob Haken is a Partner at HFW with experience including M&A and equity investments (particularly in insurtechs), advising on corporate, regulatory and commercial matters affecting the industry.
