Insurance sector transformation fueled deal activity in 2016, while global uncertainty acted as a brake on strategic M&A in 2017. How did these two opposing forces affect M&A activity in the past year, and what’s the outlook for 2018 and beyond?
While 2017 was not a stellar year for insurance M&A, deal activity contained signs of the M&A trends expected to accelerate as insurers seek innovative ways to transform, using business acquisitions or disposals as elements of that transformation.
EY expects to see a number of “Wow, that changes everything” moments in 2018, as participants or new entrants announce innovative business initiatives that fundamentally alter the role and economics of significant elements of the insurance sector.
Although 2017 recorded the lowest number of deals since 2010, total value of deals grew modestly, driven mainly by an increase in US$1 billion+ deals compared with 2016.
M&A in a period of sector transformation
Portfolio optimization continued through 2017, with a number of major insurers simplifying and streamlining their businesses, often as a critical step in creating future business models.
Sector transformation has driven M&A activity in 2017 in a number of ways and it is likely that transformational deal activity will continue through 2018 and beyond.
The majority of recent M&A activity has been in respect of traditional deal types — portfolio optimization as well as mergers aimed at accessing or sharing the cost of development of key capabilities. If insurers are to operate effectively in a world of rapid technology innovation, convergence between sectors and the growth of emerging digital ecosystems, then we expect to see a corresponding shift in the nature of M&A.
Investing into digital ecosystems
Insurance business models are being redefined through the use of technology and the fundamental redesign of traditional value chains. Insurers are grappling with how to enter into new types of partnership arrangements, often within the context of newly developing, digitally-connected business ecosystems.
In this context, EY defines “digital ecosystem” as the combination of systems, businesses and services that insurers develop themselves as well as the wider ecosystems in which the insurers will operate. Such overall ecosystems will include a wide array of potential business partners and competitors.
Digital ecosystems open the prospect of access to new markets and solutions. For insurers, this is both a massive opportunity and an existential threat. Digital ecosystems will also be a route for sector convergence, with players from outside of the insurance sector competing for roles in the value chain.
Such convergence may result in a number of the “wow” moments in 2018 and beyond. Successful M&A will come from insurers combining the talent developing in centers of innovation with the deep experience and knowledge across their existing organizations, to create diverse teams addressing fast-changing opportunities.
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EY legal contacts:
Jean-Christophe Sabourin – Global Transaction Law Leader
Richard Norbruis – Global Transaction Law Markets Leader