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Investing into innovation

Investing into innovation

Today’s insurers are facing a perfect storm of three converging factors: the struggle to achieve top-line revenue growth, changing customer needs and expectations, and encroaching technology giants and other new players taking market share from incumbents.

In light of these pressures, innovation is a business imperative. Insurers must rethink their business models, operating models and customer engagement methods in order to maintain and gain market relevance—and, for many, this process is already well underway. Yet while there has long been focus on organic innovation, many insurers are now recognising that InsurTech partnerships, mergers and acquisitions (M&A) and corporate venture capital (CVC) initiatives are critical to business transformation.

InsurTech investment and transformative M&A

In a 2017 KPMG survey of insurance industry executives, 62% indicated that their company either had or was planning to create a venture capital fund to invest in InsurTech. Despite early fears about disruption, most InsurTechs are more interested in partnering than they are in unseating incumbent players. CVC investment creates a symbiotic environment, with insurers looking to acquire organically and InsurTechs delivering innovations that help achieve cost savings, improve efficiency or grow top-line revenue.

Current activity speaks to healthy investor interest and a maturing global InsurTech sector, with ever-larger InsurTech raises in the headlines. For example, pay-per-mile car insurance firm Metromile recently raised $90 million in Series E funding. However, signs also point to an approaching inflection point. As valuations continue to grow, investors will need to re-evaluate how aggressively to invest, as well as their ongoing involvement and exposure in the space given the current lack of meaningful InsurTech exits.

Transformative M&A also continues to be a big driver of activity throughout the sector. Due to a long-term low interest rate environment and struggles to achieve meaningful growth, insurers are increasingly looking to M&A to acquire capabilities that are not inherent in their business. Target companies help insurers’ capture cost synergy, increase competitive advantage, and transform their products and services to appeal to today’s customers.

With transformation as a goal, we will see more insurers becoming comfortable with larger acquisitions. One recent example is AXA’s acquisition of XL Catlin, designed to achieve greater scale in the commercial business as potential growth engine. We may also soon see more transformative acquisitions in InsurTechs as well as in broader technology firms with relevant specialisations, such as AI, to assist incumbents in business transformation.

Preparing for transformative activity

Insurers looking to drive innovation through CVC and M&A are recommended to:

  1. Invest in the ability to scan for signals of change. Technology is driving growth and change in industry sectors across the globe. As the pace of change continues to accelerate, insurers must foster the capability to not only to scan the wider market for signals of change, but also to differentiate signal from noise and assess these signals for their relevance to the corporate strategy, direction and growth. To gain full value, market insights should also be brought back to the business, rather than funnelled to a siloed innovation team.
  2. Rethink the M&A playbook. M&A deals designed for innovation and transformation require a different approach, from identifying the right acquisition targets through to the processes of valuing and conducting due diligence on target companies. Previously, M&A activity was driven operationally and financially; yet now from a commercial perspective insurers need to view and assess potential acquisitions as ways to achieve the larger corporate vision. Technical diligence will also become a bigger factor, requiring the development of new skills—or new people—within the corporate development department.
  3. Make integration a priority. As insurers look to transformative deals as part of the innovation strategy, integration will become a larger consideration. Unlike organisations purchased to acquire cost synergies, many technology-enabled companies can be light in both assets and headcount. The challenge then becomes integrating the acquired firm within the larger organisation in order to meaningfully extract value and enable corporate transformation without damaging the capabilities that made that company attractive. Prior CVC investment can provide significant advantages in this process, allowing the insurer to ‘date before they marry’ to gain an inside-out view of the target company.

Insurers must innovate or risk disintermediation in an evolving industry. To achieve success, incumbent players must think beyond the traditional drivers of CVC and M&A in pursuit of transformational opportunities that can help meet the needs of today’s customers while creating broader strategic value.

Article originally published in The Digital Insurer's August newsletter — Insurance innovation through acquisition and investment.

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