’What we will see is large brokers wanting to have an insurtech option within their portfolio – [we are] seeing that now’, says chief commercial officer
Technology is still both a deal catalyst and a barrier when it comes to M&A in the insurance market, but the insurtech element of the market is working to ensure that it is seen as a facilitator rather than a blocker.
M&A and consolidation has formed a large part of the conversation whenever the UK’s broker market has been discussed over the last few decades, with the amount of brokers operating in the UK falling by an average of 0.4% year-on-year from 2018 to 2023, according to statistics from Ibis World published last year (6 August 2022).
And according to figures from FTI Consulting, published earlier this year (22 March 2023), broker M&A deals in the UK during 2022 hit 177 transactions – a slight fall from the 197 deals seen in 2021.
In the insurtech world, M&A is also heating up. Commenting on the subject, Andrew Johnston, global head of insurtech at Gallagher Re told Insurance Times: “My overall impression is that there has been an uptick, but it’s not to the extent that some commentators anticipated.
“The theory behind an uptick in M&A is a solid one, as much as you are seeing company valuations in some cases come down, you’re also seeing the comfort level of integration of technology in the industry going up.”
The first half of 2023 has certainly seen some larger insurtech deals come through the pipeline – May 2023 saw Verisk buy software supplier Morning Data, while IS2 joined forces with Percayso and Insurtech 50 firm Stubben Edge launched three new affinity partnerships following another £5.6m cash injection.
In Gallagher Re’s Insurtech Quarterly Report 2023 Q1, Johnston said: ”There is a lot of speculation that we will see some significant M&A activity this year – the hypothesis for this is strong, given that we are likely to observe a number of insurtechs who were once greatly prized, but for whatever reason did not quite make it.
”If the underlying technology and management team are still intact, and the prices come down as expected, these companies could represent a real bargain to prospective buyers.”
Later in Gallagher Re’s report, Gopi Rangan, founding partner at Sure Ventures, added that he believed ”wise leaders in insurance will aggressively pursue M&A as a strategy to boost in-house technology capabilities”.
Technological deal breaker
With the potential for firms in the insurance sector to bolster their in-house technological capabilities at cut-price rates, could we be about to see more brokers and insurers buying up insurtech firms?
A lack of up to date technology or the presence of unwieldy legacy systems can present a problem for these firms when trying to complete their own M&A deals.
Eva-Maria Barbosa, partner at Clyde and Co explained: ”The absence of sufficient technology investment on the part of a seller can be a deal breaker – potential acquirers can be put off if they think they need to spend millions to make a target company’s IT systems fit for purpose.”
Joe Sultana, commercial director at commercial lines eTrading platform IS2, explained that M&A customers have “become more complex” when looking to purchase firms because of the increasing digitalisation of insurance.
He added: ”[Brokers] have so many parts to their business – whether that’s MGA wholesale schemes, retail or open market etc – there’s not one [technology] supplier that can deliver everything.
”That’s where these brokers are looking for technology to best suit a particular part of their business, because [it has] become much more complex than before.”
Gerry Goodwin, chief commercial officer at Dufrain, told Insurance Times that this complexity represented a challenge for insurance businesses seeking to carry out M&A, which was only exacerbated by the fact that there was “no silver bullet” or one size fits all insurtech or technology solution for acquirors.
He added: “There’s a lot of technology out there trying to do on point solutions. [But] some of the larger brokers have quite complex legacy systems and they [often] feel that the effort [required] for reward in terms of getting those systems transferred is just not worth it – it’s too much hard work.”
Johnston believes that acquiring insurtechs is as much a strategic decision for potential acquirers as it is a creative route.
However, making strategic moves in the insurtech market is not always simple.
In Q4 2022 and Q1 2023, the world saw technology giants such as Google and Amazon slash staff numbers.
This slimming-down was mirrored by the insurtech sector with Zego cutting 17% of staff headcount, Next Insurance making 17% of its staff redundant in July 2022 and CyberCube reducing its staff by 30%.
At the time, Paul Williams, chief executive at Ripe Thinking said: ”Over the next 12 months the implications are businesses continuing to pivot models, as they have to address shortcomings in the revenue and costs.
”You will see businesses merge and sell, I think you will see increased M&A particularly in insurtech – there will winners who have a sustainable model and can demonstrate it.”
While the readjustment in the market may leave some bargains on the table, purchasing market share doesn’t always equal growth.
Insurtech firms have been known to cut costs or pivot models to avoid difficulty, as in the case of reverse auction marketplace Honcho, which moved into B2B embedded insurance.
Despite this, Williams predicted more and bigger M&A deals that would see insurtech firms acquired.
He said: ”What we might see is insurers starting to purchase some of the technology from insurtechs that are bringing something they would find hard to make themselves.”
There has also been a “blurring of the lines” in terms of what an insurtech firm is, said Williams, as some firms operate across several functions. For example, ManyPets functions as an MGA and an insurtech.
Likewise, Brolly, which was snapped up by Direct Line back in July 2020, also operates as a broker and insurtech startup.
Williams also noted fintech player Revolut entering the pet insurance market with an app, further blurring the lines.
In Gallagher Re’s report, Johnston explained that the term insurtech broadly covers two forms of business – tech-enabled insurance businesses and technology companies who primarily sell their services or products to insurance companies, which are often called software as a service (SaaS) firms.
Sultana added that brokers could now also operate outside of their traditional functions.
He explained: “Brokers now have capacity, they can be an MGA, they can write the schemes, they can be controlling pricing and they can be taking more and more risk on board.
”[Suddenly] that landscape, driven a lot by M&A, has become more complex. Helping [brokers] navigate this is also a challenge because some of these larger organisations don’t really know where to go or what technology they should be using.”
Goodwin added: “What we will see is large brokers wanting to have an insurtech option within their portfolio – [we are] seeing that now.
”The lines have blurred with some of the larger insurers and brokers creating their own innovation organisation.
”I have seen that morph into ‘let’s buy more insurtech and bring it in-house’. There’s an element of larger companies sort of hanging their nose over at the moment.”
Almost a holy grail
And this is where the FCA’s Consumer Duty regulation comes into play.
Under Consumer Duty, which will come into force on 31 July 2023, insurance firms will be required to provide customers with products and services that meet their needs and offer fair value, meaning that communication must be clear.
But how can consumer understanding be achieved when technology is so disparate across the market?
For Goodwin, M&A as a strategy can be grouped into two main philosophies – companies that buy firms and let them operate on their own terms and firms that buy with the intention of integrating the acquired firm into its structure.
He emphasised how tricky integration could be, adding: ”This is almost a holy grail for some large companies, [but] the single view of a customer shouldn’t really be a holy grail. If every policy and type of business written was on the same system it wouldn’t be a holy grail.”
Despite this, Goodwin predicted that insurers would “hedge their bets” and invest in insurtechs for the technological benefits that they can bring.
As for M&A in the broker market, this is set to continue and may accelerate as technology becomes less of a barrier and is integrated into the market – even if there is “no silver bullet”.