How InsurTechs pushed the evolution of insurance M&A
Hippos, Sails and Lemonade: Historically, insurance M&As faced challenges achieving economies of scale due to a lack of technology or assets.
Historically, the insurance world’s value chain hierarchy was as follows: Carriers develop products while captives or independent advisors distribute it.
Now, with InsurTechs, online options and rate aggregators, the lines have blurred.
Initially, the debate was: Are today’s InsurTech startups insurers with technology approaches or technology companies that support insurers? Popular thinking favored the latter. However, that debate is now complicated by the latest startup trend: Technology companies that own and distribute insurance.
The paradigm shift began with brokerages, challenged with distributing their digital solutions on a wide scale, and facing gaps in scalable technology and single-entry, multi-carrier interfaces. Brokerages merged and outgrew their suppliers. Now they dictate products, commissions, and even white-labeling solutions to assume ownership of the marketing of insurance products.
Consider the recent Aon-Willis Towers Watson merger: New mega-brokerages will have unprecedented opportunities to scale their businesses as they market themselves as a one-stop-shop not only for brokers but for policyholders and true digital providers. They demand solutions from product and service providers for the solutions needed to scale.
Economies of scale in traditional acquisitions
Typically, insurer A bought insurer B and inherited the latter’s book of business and technology. These acquisitions targeted distribution opportunities, extended into non-standard or specialty product lines, or entered new geographic markets. Acquisitions helped leap-frog rating, licensing and regulatory hurdles.
Historically, these M&As faced challenges in achieving economies of scale due to a lack of scalable technology or assets to improve efficiency as many independent carriers within the market were still using legacy systems. These M&As consolidated assets but further siloed legacy systems, meaning they did not create synergies.
Modern acquisitions
Today, as insurers modernize their core systems, they will be able to easily extract books of business from one system into another. One-to-one book transfers can be [relatively] seamless transitions because the modern core systems support data mapping tools and migration. These M&As allow greater market synergies as carriers only buy the portions of books that meet their growth goals. Brokerages and advisors have perfected this type of transfer.
Again, though, these M&As support portfolio growth and not necessarily scale across back-office processes.
Beyond the debate of traditional vs. modern
Insurance companies began purchasing and investing in InsurTechs to expand their product offerings, distribution opportunities and scale their technology offerings as alternatives to M&A. Tokio Marine and Intact jointly invested in pay-by-the-mile auto insurance company Metromile, looking for solutions to simplify the insurance experience. Similarly, Prudential Insurance’s acquisition of Assurance IQ’s data science and machine learning will improve application times and add new revenues not sensitive to equity markets, interest rates and credit.
Most InsurTechs run losses but have the funding to support them. Ultimately, they are not proven, sustainable businesses, but investors fund them for growth opportunities and technology. Insurance regulators will not allow carriers to run losses, eroding their premium base and threatening their ability to meet claim obligations.
Lemonade started as a peer-to-peer technology approach for insurance. They adapted from InsurTech to an insurance company to prove market appetite existed for tech-driven insurance offerings. Now they are announcing an Initial Public Offering (IPO) while still running tech-style losses with their re-insurers absorbing the regulatory risk. Their underwriting losses are underwritten by re-insurers versus an investment base.
Is this a single interesting experiment or could it become a trend?
InsurTech Hippo also recently acquired Spinnaker Insurance. The itch of a next-level digital experience acts as a catalyst for insurers to bypass the red tape and bureaucracy carriers usually face for these kinds of projects. Hippo can continue to leverage Spinnaker’s appetite for technology for future projects. Spinnaker, on the other hand, as an insurer, cannot run losses to fund their digital development but can justify the technology spend with their investment in Hippo.
This next-generation of M&A cements not only the investment relationship but also the technology commitment between them. In these cases, client-vendor relationships have been freed of bureaucracy and processes that could potentially be disrupted by other vendors.
Looking down the road
Investing in technologies is trendier and seen to give better returns. In an era of low returns overall, this appetite for technology demonstrates that investment is in the wrong place. Consider: Nike’s supply chain from factory to the end-consumer is covered heel-to-toe by insurance — property coverage, employee liability, cargo, product liability and warranties. Insurance is quintessentially what underwrites our economy, yet we bind the investment in this industry with high regulatory concerns.
InsurTechs are potentially in the position to buy insurers for the same reasons they bought each other (market access, growth, expansion) and prove their value rather than looking for an insurer to buy them out. The combination of innovative technologies with established insurers provides excitement in the industry, but it will be interesting to see if more future acquisitions are driven by InsurTechs and not insurers.
Doug Carsley (doug.carsley@capco.com) is a partner at Capco, the insurance and financial services consultancy. Carsley has more than 20 years of experience in financial services and consulting on both the institutional and vendor sides of the industry. He has led the delivery of several large-scale projects focused on improving the customer experience from inception to implementation. He has run system integration and consulting businesses servicing Canada’s largest financial institutions.
These opinions are the author’s own.
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