Mark Huxley & Matt Carter, JDX Ambassadors
Why is M&A so prominent within the Insurance industry?
The insurance sector is on the threshold of a major pivot. Much of this is being brought about by a combination of underperforming classes where products require re-engineering to make them truly fit for customer purpose, too many archaic procedures and practices with too many touchpoints as well as good talent being diverted from using their real capabilities of technical skills to process manage. The results are unacceptably high operating ratios leading to a systemic failure to fully embrace future opportunities. It is against this backdrop that for decades now the industry has swung between big is beautiful to small is agile and responsive. This means a constant striving to either bolt together large operations to reduce combined cost and create global scale, to teams moving between organisations to seek out the best personal opportunities. Whilst M&A continues with the big seemingly getting even bigger, this has also created a surge of well-funded new entrants into the industry, fresh targets for future rounds of M&A!
Considering the current environment, would you expect to see a rise in M&A activity within the next couple of years?
In the forty plus years we have been in the Market these cycles have been the one constant and we so no sign of this changing anytime soon. In fact with the material impact the Covid crisis has created there is an argument that as businesses recover and seek new tailwind opportunities, this may actually see a material increase in activities as businesses strive to meet new customer challenges against a backdrop of cost containment and the need to drive better customer loyalty. More digitisation leading to less manual intervention in decision making and processing creating a new X-factor in this current cycle.
What do you think are the biggest challenges for insurance companies within the M&A landscape? & how do you think these challenges can be addressed?
With the traditional top down approach to M&A where the big concepts are front and centre with the nature of insurance businesses much is missed about the true costs and dynamics of M&A. At the very heart of this is the balance between perceived financial benefit over the huge cultural shifts that merged or acquired businesses undergo. As an industry dominated by the reputations of its people, bringing new teams together to agree, accept and undertake a common goal is no small task. This is equally matched by the sometimes unfathomable array of technology used, much of it unable to speak from one system to another. Clearly understanding these is the key to a successful M&A transaction, sadly though this is often overtaken by all the “day one” requirements. It is vital therefore to have a clearly communicated target operating model and measurements that will drive them to an identified new culture. An ability to properly do this will help move clients from the previous entities to the new organisation and in the regulated environment that governs the sector, mean that there is a demonstrable culture that will give comfort to the regulators that the new entity is well organised and less of a risk for regulated failure. All of the above are critical, but so to is delivering a well articulated plan and purpose for any new Co, which provides both comfort and clarity to the workforce that any change is a means to a much better end.
From your experience with M&A, what observations do you have on preparations for post-deal activities?
Like many things, the adage of “fail to prepare, prepare to fail” comes to the fore at these times. Thinking about these things post transaction is far too late and there should be no area of the business that does not fall under the microscope of scrutiny ahead of any deal being signed. The higher pre-deal costs of doing this will far outweigh the much larger potential cost of a failure post-deal! Every one of these decisions must be made on the basis of causes, effects and consequences and properly war-gamed to see how decisions not only affect themselves but all other parts of the combined critical operating infrastructure.
Cognitive risk exists to help firms nurture innovation and where ‘Insur meets Tech’. Have you managed to assist on M&A engagements and help them adopt new technologies?
We do help businesses reimagine their purpose and signpost appropriate technology in building a better business or delivering against a defined problem statement. Whilst we have not directly assisted with a post M&A engagement, with a lot of experience assisting businesses manage the complexities of switching between technology vendors and reducing that risk whilst looking to realise operational improvements. For the reasons already said elsewhere, we are an ideal fit to help entities that have come together navigate a better path to the best single platform to drive the business forward.
In your opinion, how have Insurance companies reacted during the months of lockdown?
Insurance people are by their nature problem solvers and times such as these bring out the best in them to quickly adapt and find new ways of working. This is a trait that should be admired, which on occasions makes for great frustration when, without the crisis, their lack of speed to change nor appreciation of the need to do it become far too apparent.
In your opinion, what implications will Covid-19 have on the Insurance industry?
Sadly certain sectors of the industry are not coming out of Covid with a great reputation, which once again casts a shadow over everyone. It will therefore have to fight hard to demonstrate that it has learned lessons, has reappraised many of the product wordings and coverages it offers and created a better dialogue with its customers. With the emergence of a new generation of policy types; on demand, parametric and peer to peer as examples, like much else this single crisis might actually be the catalyst to some much needed accelerated changes for both the new entrants and incumbents in equal measure. Certainly the industry needs to have a good listening ear and take heed of what’s being said.
Almost as a footnote it has shown how adaptable businesses can be and more so their employees and that this crisis has reappraised the value of work and where it can be done, many obstacles or blockers to digital trading have been smashed as a result of covid, which in our opinion is a good thing.
What do you foresee as the biggest risks/challenges the Insurance industry will face in 2020?
There is one overarching challenge it faces at the macro level. It needs to really take a long hard look at many of its “whys”. Why does the industry too often suffer reputational issues, why is it customers too often complain about products and service, why are its operating overheads too high, why does it suffer reputationally when it comes to employee diversity. Along with the whys, then come the “hows”. In a nutshell how can it address all these whys and emerge into the new post Covid era in better shape, ready to address all the big society changes that we are all facing through the rest of 2020, into 2021 and beyond. At the micro level we would challenge the industry to think about how can it make the micro-innovations that will see it move steadily and consistently forward, rather than thinking it’s always about big step changes that are too big to do.
We remain ever curious and questioning of ‘is there a better way’ so are looking forward to answering some of the “whys” with businesses that are seeking to emerge as a better version of themselves post 2020.