By Daniel Hunter
A new global report from PwC looking at the future of insurance M&A has found that the strategic importance of M&A to insurers across the globe is set to increase. Experts believe that European insurers could slice 2-3% off their combined ratios by emulating pricing best practice from markets such as the US or Australia.
However the report, entitled “Insurance 2020: A quiet revolution — The future of insurance M&A”, says that transaction volumes won’t recover along the same lines as during the last decade and instead, the next few years will see a ‘quiet revolution’ in global insurance M&A.
“The global insurance industry’s outlook is improving. The mature economies of Europe and North America are moving towards recovery, while the emerging markets of Asia and Latin America continue to grow," Nick Page, transaction services partner at PwC, said.
"A pick-up in global premiums is forecast, but the industry should not expect a return to the old ways. Insurers are operating in a world where the goal of long-term growth seems to be getting further away. Instead insurers face a range of obstacles including persistently low investment yields, tightening regulation and overcapacity in many markets."
In the short to medium term, low profitability will have a critical effect on insurance M&A. Weak profitability is closely linked to low investment yields, and is encouraging insurers in mature markets to seek domestic deals and to plan international expansion.
“As insurers adapt their business models to this new environment, the strategic importance of M&A will only increase. However we do not expect transaction volumes to recover to their pre-crisis levels. Instead, we predict the next few years will see a quiet revolution in global insurance M&A," James Tye, transaction services partner at PwC, said.
Key findings from the report include:
· Technology will play an increasingly important role in insurance deal-making, and insurers are expected to acquire technological expertise, for example, in telematics, as a defensive strategy against disruptive new entrants.
· Communication or social networking companies could also use M&A to acquire an insurance vehicle and combine it with their high levels of customer insight and trust.
· Over the next few years the ability to price individuals rather than groups of customers will become an increasingly important driver of M&A.
· Premium growth in developed markets is slowly recovering from 2010’s low, but remains restricted by slow economic growth.
· The search for greater scale remains a crucial strategic response to these challenges, and the drive for domestic consolidation will continue to shape global insurance M&A.
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