As lockdown restrictions eased in England and Wales in July, the situation for insurers looking to the future was bleak. The prediction from one of the Big Four firms was: “It’s likely you’ll find yourself competing for a bigger share of a smaller market and smaller wallets of consumers and businesses.” 


One of the action points in PwC’s Beyond Covid-19 report was that retrenching firms consider their merger and acquisition options, as well as a slew of cost-cutting measures. 


Consolidation was on the agenda before covid, with last year seeing Allianz making two UK acquisitions while this month UK car insurer Hastings looked set to be taken private by a South African firm and Finnish insurer Sampo. 


However, a lot of the action on M&A now looks set to come from the private equity market, rather than other corporations.

Although deal activity is split roughly 50:50 at the moment, there are signs that changes to private equity that have traditionally hindered investment in insurtech especially are starting to come down. 


While private equity might usually want a 20 per cent return after four or five years, a new set of funds are taking a 10-year view with a return in the teens, a better fit for getting an insurtech going. 


Transaction services and financial services partner at PwC James Tye says: “The private equity world is evolving through the creation of longer hold, lower return funds which better facilitate investment into insurance. With a longer cycle comes better acceptance by regulators. 


“Private equity is a lot more involved and willing to embrace more ambitious change. Corporates can be a lot slower to do this. You would be surprised at how behind the curve insurance can be. Telematics has been around for 10 to 15 years but is not fully implemented yet."  


The share of activity brought through by private funds is likely to grow significantly by the middle of the decade, he said, as insurance was still under-represented on funds’ dashboards. 


“Fifteen years ago, 10% of my work was PE, in five years I wouldn’t be surprised if it was 75%. It’s much more expansive now, given fund availability, specialism and reach.”


Even before Covid-19 disrupted a host of industries, private equity was thought to be sitting on $1.5trillion of dry powder. 


What kind of businesses could be the target of investment or acquisition? Smaller firms and offcuts from companies that are looking to rationalise their operations could be part of the answer.

“Direct Line has seen 70% fewer claims in April 2020 than during the same period in 2019.”

Tye says: “In the corporate world there’s a focus on planned disposals, of ‘let’s focus on our core market’. Private equity can be keen to pick these things up.” 


Meanwhile, some monoline insurers might be facing questions of scale. 


The mass experiment in working from home since the start of the pandemic has also focussed mind on which bits of corporate cost base could be shed, particularly expensive office space in a central business district. 


Last week, London-based RSA Insurance Group announced it could be looking at 300 redundancies, reducing its office footprint and “tackling complexity” in its product portfolio. It was reported it would no longer offer wedding insurance from next year. 
The pressure parts of the industry face could spur the incumbent firms to work more closely with the insurtech upstarts, new entrants to an industry where some players go back 200 years. 


Rachel Hillier, financial services and insurance partner at Capital Law, said the larger companies might seek joint ventures with start-ups, rather than a straight buy-out. 
She cites Munich Re’s tie-up with Digital Partners as an example, adding: “Covid-19 has affected everybody and has thrown up some good opportunities; partnerships with insurers wanting to invest and have joint ventures.  


“I don’t see the market investing in buying up insurtech, they just don’t understand it well enough. Whereas there are specialist firms that do just that, eg. Eos Venture Partners or Anthemis.” 


Areas of interest are likely to be those where AI products genuinely increase the ability to gauge risk, or allow the masses of data already held by firms to be used more effectively.  This is likely to be especially important in the fast-growing and fast-changing world of cyber security. 


Motor insurance is another area where incumbent providers have been slow to realise the potential of telematics technology and is a sector facing a challenge from covid-19 and new entrants. 


A recent deal between Zurich UK and usage-based specialist By Miles showcases the kind of partnership we might see more of, and which comes at a difficult moment for a sector where margins were already low and competition high. In this example lockdown might have prompted many motorists to wonder whether their fixed rate deal was the best option.

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