The COVID-19 pandemic is accelerating the transformational trends impacting the insurance sector and highlighting the need for bolder actions in areas such as digital capability and effective engagement to address customers' needs post-pandemic. In the 2021 Global Corporate Divestment Study, over 90 percent of companies in the sector say the changing technology and competitive landscape are directly influencing their divestment plans.
This comes as insurers face an uphill battle to maintain returns on their capital. Challenges include distribution models, outdated technology, increasing dependence on asset management fees, regulatory constraints, improving tax positions and the need to achieve greater cost efficiency. Persistently low interest rates add to these headwinds.
These forces are driving management teams to scrutinize their balance sheets and re-evaluate business units more closely.
Shifting to a simplified, digital future state
The pandemic also reinforces the long-standing need for insurers to shift to better, more forward-looking models that emphasize an enhanced omnichannel customer experience and more efficient cost base.
Moving to this attractive future state requires leaders to make difficult divestment decisions. But an appetite for change is evident across the sector: almost two-thirds of insurers in the 2021 EY Global Corporate Divestment Study expect to initiate a divestment within the next two years (nearly a third (29%) in the coming 12 months).
An important benefit is liberating management time from non-core areas and legacy practices. Capital from divestment proceeds can be reallocated toward higher-return businesses that are core to the renewed strategy, while cash flows will be freed by reducing complexity and the overall cost base. This can support efforts to build simplified, digital-first insurers.
Such a strategy involves developing a robust vision of a streamlined, sustainable operation. Management needs to embrace the idea of a company repositioned to drive higher growth — not simply a smaller one where divestment has helped to fund digitalization. The move to digital engagement and products requires significant technology investment — and will likely create a very different sector.
Preparing for PE demand and risk appetite
While synergy-driven deals between incumbents continue, insurers regard private equity (PE) as the likeliest buyer of their divestments. About half (44%) of companies in the insurance industry anticipate selling to PE, compared with just 19% who expect foreign emerging markets financial institutions as a likely buyer.
This is especially true of the life insurance subsector, where PE-backed consolidators continue to experience above-market growth.
In situations where strategic deals make sense, insurers need to create value stories that appeal to the PE buyer group and package non-core assets as stand-alone businesses or with very clear, ongoing commercial arrangements. They should also keep in mind that this buyer group uses an array of deal models from traditional reinsurance to carve-outs.
PE firms are generally credible buyers with demonstrated track records of respecting the interests of policyholders in many markets. Management should allow early consultation with regulators. If stakeholders react negatively, potential reputational risks should be managed.
Managing multiple options to maximize price tension
Insurers seeking to divest should look to benefit from competitive tension between multiple buyer groups, including foreign and domestic buyers from within the sector, as well as non-regulated financials and "convergent" technology players.
Insurance divestments can take multiple forms, including:
- JV/industry utility
- Classic sale
- Special purpose acquisition company/IPO
- Reinsurance agreement
- Closed book sale
Significantly more insurers expect divestments across various deal types to increase over the next 12 months than those who see them declining. Ten times as many anticipate growth in JV or industry utility deals, for example.
While this multiplicity provides a supportive backdrop, how should insurance CEOs address the challenges? The key is highly disciplined strategic reviews and understanding potential deal options.
Connecting to a supportive ecosystem
A productive repositioning route that insurers are considering is the ecosystem approach, engaging with InsurTechs and other collaborators to innovate and raise margins while reducing costs.
They pool complementary capabilities — technology and distribution — to create greater value together.
Ecosystem approaches require CEOs to have strategic clarity over the portfolio. This can involve shifting non-core tasks outside the company through outsourcing, offshoring and/or partnership delivery.
Management may also need to be open to collaborating with the competition.
Despite the insurance sector's reputation as reactive, this kind of imaginative response is gaining traction. Over 70% of insurers surveyed for the study indicated that a joint venture or industry utility as the rationale for their last divestment.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.