Driving the deals - M&A in the Global Insurance Industry

27 Sep 2016

Timetric’s report on M&A in the global insurance industry identifies four key categories of the drivers of M&A activity in the global insurance industry.

Timetric’s report on M&A in the global insurance industry identifies four key categories of the drivers of M&A activity in the global insurance industry, namely: business expansion, increasing efficiency, market and economic conditions, and simplifying business models.

Business Expansion

Increasing competition due to globalization, in addition to difficult economic conditions and customer expectations, are restricting insurers’ revenues and profitability. The need for revenue growth is motivating insurers to adopt inorganic expansion. Growth and diversification remain the key factors behind increased M&A transactions in mature economies.

Research identifies a trend among large insurers with strong balance sheets to enter high-growth markets in emerging Asia, Africa and Latin America. Robust economic and demographic indicators provide significant growth opportunities in these markets, where insurance penetration is low. Appealing demographic features such as population growth, a rising middle class population, and growth in trade and commerce are motivating factors. This enables insurers to increase their product ranges and build scale using a broader group customer base.

Achieving Efficiency

Since the insurance industry is more competitive than ever, insurers are increasingly using M&A as a strategy to acquire businesses which will add value, facilitate efficiency and scale, by improving processes and adding new capabilities. M&A strategies to achieve cost and capital synergies will enable insurers to reduce operating costs.

Although insurance is seen as a conservative industry, insurers understand the importance of innovation with the industry’s changing dynamics, Timetric contend. There have been shifts in customer demand and purchasing patterns, and changes across the insurance process, including product development, sales and marketing, underwriting, customer service and claims management.

Economic and Market Factors

Fluctuations in interest, in particular persistent low interest rates since the global financial crisis, impact premium rates, demand, balance sheets, and investment income. Consequently, insurers are increasingly scouting for strategic deals to tackle the impact on their business. This has encouraged insurers and reinsurers to streamline their operations, divest non-core businesses, and rationalize investment portfolios; thereby leading to an increase in M&A deals.

Low interest rates have also encouraged M&A activity as they have made the cost of financing cheaper for many companies. Given that the uncertainty that surrounds interest rates in the medium to long-term, insurers are using this opportunity to acquire companies while capital is relatively inexpensive.

Changes in insurance regulations have created a structural shift in the insurance industry, with an emphasis on establishing risk-efficient and well-capitalized insurers. The introduction of risk-based regulatory regimes such as Solvency II in Europe can have various strategic implications such as; business diversification, risk mitigation, simplification of business models and portfolio rationalization. Small and medium-sized insurers are under pressure to defend their positions and engage in M&A activity as a result. Solvency II makes guaranteed products more capital-intensive than ever, and significantly increases capital requirements which for some are unsustainable, encouraging insurers to engage in M&A activity.

Simplifying the Business Model

According to Timetric, it is a prudent step for insurance groups to contemplate simplifying their business models in a highly competitive and complex environment. Simplifying business models implies streamlining of operations and effective utilization of organization’s capital and resources to achieve strategic goals.  The process of consolidation facilitates simplification of business models.

Simplifying insurance business models also involves focusing on businesses which support and augment an insurance group’s future strategy, and the disposal of non-critical operations. The strategic focus hypothesis means that insurance groups can maximize shareholder value by focusing on their core businesses and competencies.

This information is based on a Timetric insight report which can be found here: https://www.timetricreports.com/report/is1269mr--ma-in-the-global-insurance-industry/ 

Source: Company Press Release