M&A activity expected to rise in North American insurance sector

Insurance executives are anticipating an uptick in the number of mergers and acquisitions (M&A) in their sector, according to the results of a recent survey administered by Towers Watson.  A strong majority, 86 percent, of respondents said they expect to see a higher level of M&A activity during the next one to three years, relative to the previous three years. Tellingly, almost 80 percent said their firm is currently considering an acquisition.

Jack Gibson, managing director of Towers Watson's global M&A practice, noted that the company observed a sharp decline in M&A activity after the 2008 financial crisis, to the point that transactions were at "an unnaturally low level in most of the world."

"But lately we've seen a strong trend toward accelerated activity that has featured bold, transformative moves into new geographies, product lines and distribution systems," Gibson said. "Many of these recent deals have been well received by both buyers and sellers, bringing significant value, attractive platforms and superior talent to the marketplace."

Insurers see opportunity to enter new markets through M&A

Respondents overwhelmingly selected North America as the most attractive region for making acquisitions, with 87 percent ranking it as their preferred place to do business. However, that does not mean that carriers are not interested in expanding the areas where they offer coverage.

Almost half, 47 percent, of respondents who said their firm is considering an acquisition indicated that they are primarily focused on expanding into new markets. Looking ahead, 58 percent of insurers said they believe the desire to expand into new geographic areas or customer segments will remain a key driver of M&A transactions.

Any insurance company engaging in a merger or acquisition needs to be prepared to absorb the other party's book of business. But when a company is acquiring policies outside of its usual area of expertise, in terms of geography or the type of property being insured, accurately calculating replacement costs and Insurance-to-Value (ITV) ratios can be a challenge.

This isn't an area where insurers can afford to make mistakes, as providing inadequate coverage for a structure could result in its owner being forced to pay out of pocket to rebuild after a loss, which would negatively affect policyholder satisfaction and the carrier's reputation. Consequently, having an accurate replacement cost estimator that covers all pertinent geographic areas and types of properties is an essential piece of the M&A puzzle for insurance carriers looking to expand their reach.