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The COVID-19 pandemic has changed the way in which we interact with the world. From working, to shopping, to socializing, most aspects of our daily lives have moved to the online world. Consumers now expect effective online platforms for all goods and services, and businesses have been forced to adapt quickly.
The need for robust online technologies drove a number of large M&A transactions for enterprise technologies in 2020. While insurance companies have struggled throughout the pandemic, with share prices collapsing due to a rise in insolvencies, new technologies have the potential to transform the industry, driving a flurry of M&A activity in early 2021. For the reasons we discuss below, we expect this heightened M&A activity in the insurance sector to increase as the year goes on.
The Technology Imperative
Consumers increasingly expect the ability to purchase insurance, file claims, and pay premiums through their online accounts or mobile devices. Accordingly, insurance companies recognize that to remain competitive insurance technology (“Insurtech”) is not a luxury, but a necessity. According to Clyde & Co’s Insurance Growth Report 2021, in 2020, Insurtech funding hit an all-time high of USD$7.1 billion. Remote working has made it impossible to develop business face-to-face, and accordingly Insurtech has become the only viable method of both maintaining existing relationships and growing the customer base.
However, the potential of Insurtech to reshape the industry goes beyond consumer-facing products. Artificial intelligence and data analytics can assist insurance providers at every stage of their operation, from pricing and underwriting to risk mitigation, fraud detection, and loss prevention. Insurtech has the added benefit of generating cost-saving efficiencies.
A Market Full of Opportunity
Significant losses and share depreciation from the pandemic have forced insurance businesses to review their strategies, resulting in a number of insurance companies actively pursuing opportunities to exit their non-core businesses through restructuring, divestitures, and other deal activity. Additionally, the financial pressures of COVID-19 have forced smaller insurance companies to put themselves up for sale.
Insurtech is contributing to this increased M&A activity. There is pressure on larger insurance companies to acquire companies with existing Insurtech, or alternatively companies with the ability or expertise to develop Insurtech in-house. For smaller insurance companies, the scale of future investment in Insurtech required to remain competitive makes the decision to sell or amalgamate far more compelling.
With the pace of vaccine distribution increasing and governments expected to continue to spend heavily to support the recovery of economies around the world, business and consumer spending is forecast to come back strong in the second half of 2021. This provides deal-makers with growing confidence, making it easier for insurance companies to raise capital and attracting private equity funds into the insurance industry. Moreover, with plentiful capital and a large pool of targets, insurance M&A should continue its blistering pace throughout 2021.
The author would like to thank Malcolm Woodside, Articling Student, for his significant contribution to this blog post.
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