The following is an excerpt from a white paper, available in full here.
I’m a huge fan of Dan Sullivan’s strategic coach program. Many years ago, he said something that, initially, I didn’t fully appreciate or understand:
“What you currently get paid for, you may do for free, or be totally taken out of. What you currently do for free may be the only way you get paid!”
Although he was referring to the advent of the microchip, his message is just as applicable to the digital disruption occurring today.
Primarily, agencies get paid for the risk-transfer mechanism they provide (e.g., insurance). They transfer the risk from the individual or business to the insurance carrier. Once the insurance is purchased and placed, the service they provide is reactive. In essence, most agencies are pass-through middlemen that respond to the needs of the insured but that otherwise add no real value.
These days, digital technology is rapidly assuming many of the functions and responsibilities for which agents used to be compensated, namely the purchase and placement of coverages, along with reactive service. This makes it easier than ever for customers, especially personal lines and small commercial lines, to buy and service most of their needs via their desktop, laptop or other digital device, with little or no human contact. This trend continues to accelerate at lightning speed.
So what are agencies doing now “for free” that may be their primary source of compensation in the future? I believe the answer lies in so-called value-added services and tools. These mainly involve providing risk advice that outlines ways to control the client’s true cost of risk, improves the client’s risk profile with the marketplace and protects their assets.
The insurance carriers are spending hundreds of millions of dollars on digital platforms. Why? For one thing, today’s consumers are demanding it. Furthermore, it costs the carriers less to do business digitally than personally. There is a staggering cost difference between transactions handled on the phone vs. online.
The use of insurance carrier service centers is also altering the way agencies operate. Originally, I wasn’t a fan. However, the carriers have invested significantly in technology and training, and I now urge agencies to put 25% to 50% of their personal lines and small commercial lines into a service center.
By the way, the bottom 50% of your customers probably generate less than 10% of your commission income. This frees up resources so that you can provide a great customer experience to your best customers. I’m referring to your A and B accounts, the top 20% that generate 80% of your revenue — not the bottom 50%.
I realize this isn’t for everybody, but if you don’t know your 80/20 numbers (discussed in depth in Chapter 4), you can’t even begin to make a valid decision about which accounts to place with a service center.
It’s also crucial to remember that once the account moves to the service center, it’s moved! It’s gone. It’s no longer in your agency. One of my research contacts said that if he were an agency owner he’d transfer as many transactions and expenses as possible to the carriers. And I agree with him. This frees the resources, agents and agencies needed to focus exclusively on risk assessment and transfers, asset protection and risk management planning.
In my discussions with insurance carriers over the years, I’ve found that 54% of incoming phone calls to the service centers are agency personnel calling on behalf of the client. Keep in mind, the client either has been given the service center’s toll-free number to call directly for assistance or the client’s call is automatically routed to the center. And yet many agencies continue to service the accounts they’ve moved to a service center. This makes no sense! Once the account is moved, it’s moved. You need to be focused on the clients you’ve kept in-house.
Embracing technology also means getting serious about using all of the capabilities of your agency’s automation system. My content partner in the Better Way Agency program is Angela Adams, CEO of Angela Adams Consulting. She’s unequivocally the best in the industry when it comes to the internal operations of agencies and maximizing their automation systems. I’m constantly questioning her about the use of technology and automation within agencies.
Recently, she shared with me that the average agency uses only about 20% of the capabilities of its internal and carrier-provided technology. That’s about the same percentage of agencies that are active in an automation vendors user’s group. I find that incredible! Learning from others is one of the best and easiest ways to maximize your system. How else — and when — are you going to do it?
If you’re behind the technological curve, your time to catch up is rapidly running out. With the proliferation of ever-evolving technology, more and more of the routine service items and transactions that keep everyone “so busy” are being handled digitally, outside of the agency. Therefore, to stay relevant and not become obsolete, agencies and their teams will need to pivot from handling transactions to providing risk advice and insurance solutions.
Selling insurance is complicated. Not impenetrable, but complicated. The sales process is sort of like a tangled piece of string— it’s easy to see the beginning and end but hard to figure out what’s happening in the middle.
When you start untangling, you’ll find prospect lists, telemarketing, direct mail, traditional marketing and web-based lead generators uncovering and enticing potential customers. You’ll also find captive agents, independent agents or brokers, wholesalers, direct telephone sales, the Internet, affiliates, carriers and carrier-like entities selling various products.
Some of these strategies work in coordination or create feedback loops — a customer sees a TV ad, which prompts him to submit a form online, which adds him to a direct mail list, which points him to an online aggregator, which puts him in touch with an independent agent selling insurance on behalf of a managing general agency… as you can see, the number of distribution permutations is considerable.
However, at American Family Ventures, we appreciate simplicity. We classify insurance distribution start-ups using four groupings: lead generation, agency/brokerage, managing general agency (MGA) and carrier.
As pictured above, the primary distinctions between participants in each group arise from the amount of insurance risk they bear and their control over certain aspects of the insurance transaction (for example, the authority to bind and underwrite insurance policies).
However, many other tradeoffs await insurance start-ups navigating among these four groups. If you consider the evolution of digital customer acquisition, including new channels like mobile-first agencies and incidental channels, choosing a niche becomes even more complicated.
In this post, I’ll discuss some of the key attributes of each group, touching on topics relevant for start-ups new to the insurance ecosystem. Please note, in the interest of time and readability, this post is an overview. In addition, any thoughts on regulatory issues are focused on the U.S. and are not legal advice.
Lead generation refers to the marketing process of building and capturing interest in a product to create a sales pipeline. In the insurance context, because of the high-touch sales process, this historically meant passing interested customers to agents or call-center employees. Today, lead-generation operators sell to a variety of third parties, including online agencies and digital sales platforms.
Let’s consider a few key attributes of lead-generation providers:
Revenue model — There are a variety of lead-selling methods, but the most common is “pay per lead,” where the downstream lead buyer (carrier or channel partner) pays a fixed price for each lead received. When pricing leads, quality plays a big role. Things like customer profile, lead content/data, exclusivity, delivery and volume all affect lead quality, which frequently drives the buyer’s price-sensitivity. As a lead-generation provider, you’ll generally make less per customer than others in the distribution chain, but you’ll also assume less responsibility and risk.
Product breadth — With the Internet and enough money, you can generate leads for just about anything. Ask people who buy keywords for class action lawsuits. However, start-ups should consider which insurance products generate leads at acceptable volumes and margins before committing to the lead-generation model. Some products are highly competitive, like auto insurance, and others might be too obscure for the lead model to scale, like alien abduction insurance (which, unbelievably, is a real thing). Start-ups should also consider whether they possess information about customers or have built a trusted relationship with them — the former is often better-suited to lead generation, and the latter can facilitate an easier transition to agency/brokerage.
Required capabilities (partnerships) — Lead-generation providers need companies to buy their data/leads. Their customers are usually the other distribution groups in this post. Sometimes, they sell information to larger data aggregators, like Axciom, that consolidate lead data for larger buyers. Generators need to show lead quality, volume and uniqueness to secure relationships with lead purchasers, but beyond that they don’t typically require any special partnerships or capabilities.
Entities in the agency/brokerage group (also called “producers”) come in a variety of forms, including independent agents, brokers, captive agents and wholesale brokers. Of note, most of these forms exist online and offline.
Independent agents represent a number of insurance carriers and can sell a variety of products. Brokerages are very similar to independent agents in their ability to sell a variety of products, but with a legal distinction — they represent the buyer’s interests, whereas agents represent the carriers they work for. Captive agents, as the name suggests, sell products for only one insurer. While this might seem limiting, captive agents can have increased knowledge of products and the minutiae of policies. Finally, some brokers provide services to other agents/brokers that sell directly to customers. These “wholesale brokers” place business brought to them by “retail agents” with carriers, often specializing in unique or difficult placements.
An important difference between the lead-generation group and the agency/brokerage group is the ability to sell and bind policies. Unlike the former, the latter sells insurance directly to the consumer, and in some cases issue binders — temporary coverage that provides protection as the actual policy is finalized and issued.
Some attributes of agencies and brokerages:
Revenue model — Agencies and brokerages generally make money through commissions paid for both new business and on a recurring basis for renewals. The amount you earn in commissions depends on the volume and variety of insurance products you sell. Commission rates vary by product, typically based on the difficulty of making a sale and the value (profitability) of the risk to the insurance carrier. Start-ups should expect to start on the lower end of many commission scales before they can provide evidence of volume and risk quality. Agents and brokers can also be fee-only (paid for service directly and receive no commission), but that’s rare.
Product breadth — Agencies and brokerages sell a variety of products. As a rule, the more complex the product, the more likely the intermediary will include a person (rather than only software). Start-ups should also consider tradeoffs between volume and specialization. For example, personal auto insurance is a large product line, but carriers looking to appoint agents (more detail below) in this category usually have numerous options, including brick and mortar and online/mobile entities. Contrast this with a smaller line like cyber insurance, where carriers may find fewer, specialist distributors who understand unique customer needs and coverages.
Required capabilities (partnerships) — Agencies and brokerages are appointed by carriers. This process is often challenging, particularly for start-ups, which are non-traditional applicants. Expect the appointment process to take a while if the carrier isn’t familiar with your acquisition strategy or business model. Start-ups trying to accelerate the appointment process can start in smaller product markets (e.g. non-standard auto) or seek appointment as a sub-producer. Sub-producers leverage the existing appointments of a independent agency or wholesaler in exchange for sharing commissions. You could also apply for membership in an agency network or cluster — a group of agents/brokers forming a joint venture or association to create collective volume and buying power.
Regulation — Agencies and carriers need a license to sell insurance. Each state has its own licensing requirements, but most involve some coursework, an exam and an application. As we’ve recently seen with Zenefits, most states have a minimum number of study hours required. There are typically separate licenses for property, casualty, life and health insurance. Once you have a license, many states have a streamlined non-resident licensing process, allowing agencies to scale more quickly.
MANAGING GENERAL AGENCIES (MGAs)
A managing general agent (MGA) is a special type of insurance agent/broker. Unlike traditional agents/brokers, MGAs have underwriting authority. This means that MGAs are (to an extent) allowed to select which parties/risks they will insure. They also can perform other functions ordinarily handled by carriers, like appointing producers/sub-producers and settling claims.
Start-ups often consider setting up an MGA when they possess data or analytical expertise that gives them an underwriting advantage vs. traditional carriers. The MGA structure allows the start-up more control over the underwriting process, participation in the upside of selecting good risks and influence over the entire insurance experience, e.g. service and claims.
We’ve recently witnessed MGAs used for two diverging use cases. The first type of MGA exists for a traditional use case — specialty coverages. They are used by carriers that want to insure a specific risk or entity but don’t own the requisite underwriting expertise. For example, if an insurer saw an opportunity in coverage for assisted living facilities but hadn’t written those policies before, it could partner with an MGA that specializes in that category and deeply understands its exposures and risks. These specialist MGAs often partner closely with the carrier to establish underwriting guidelines and roles in the customer experience. Risk and responsibilities for claims, service, etc. are shared between the two parties.
The second type of MGA is a “quasi-carrier,” set up through a fronting program. In this scenario, an insurance carrier (the fronting partner) offers the MGA access to its regulatory licenses and capital reserves to meet the statutory requirements for selling insurance. In exchange, the fronting partner will often take a fee (percentage of premium) and very little (or no) share of the insurance risk. The MGA often has full responsibility for product design and pricing and looks and feels like a carrier. It underwrites, quotes, binds and services policies up to a specific amount of written authority. These MGAs are often set up when a startup wants to control as much of the insurance experience as possible but doesn’t have the time or capital to establish itself as an admitted carrier.
Some important characteristics:
Revenue model: MGAs often get paid commissions, like standard agencies/brokerages, but also participate in the upside or downside of underwriting profit/loss. Participation can come in the form of direct risk sharing (obligation to pay claims) or profit sharing. This risk sharing functions as “skin in the game,” preventing an MGA from relaxing underwriting standards to increase commissions, which are a function of premiums, at the expense of profitability, which is a function of risk quality.
Product breadth: MGAs of either type often provide specialized insurance products, at least at first. The specialization they offer is the reason why customers (and fronting partners) agree to work with them instead of a traditional provider. That said, you might also find an MGA that sells standard products but takes the MGA form because it has a unique channel or customers and wants to share in the resulting profits.
Required capabilities/partnerships: Setting up an MGA generally requires more time and effort than setting up an agency/brokerage. This is because the carrier vests important authority in the MGA, and therefore must work with it to build trust, set guidelines, determine objectives and decide on limits to that authority. Start-ups looking to set up an MGA should be ready to provide evidence they can underwrite uniquely and successfully or have a proprietary channel filled with profitable risks. Fronting often requires a different process, and the setup time required varies based on risk participation or obligations of the program partner. Start-ups should also carefully consider the costs and benefits of being an agency vs. MGA — appointment process difficulty vs. profit sharing, long-term goals for risk assumption, etc.
Regulation: MGAs, like carriers, are regulated by state law. They are often required to be licensed producers. Start-ups should engage experienced legal counsel before attempting to set up an MGA relationship.
Insurance carriers build, sell and service insurance products. To do this, they often vertically integrate a number of business functions, including some we’ve discussed above — product development, underwriting, sales, marketing, claims, finance/investment, etc.
Carriers come in a variety of forms. For example, they can be admitted or non-admitted. Admitted carriers are licensed in each state of operation; non-admitted carriers are not. Often, non-admitted carriers exist to insure complex risks that conventional insurance marketplaces avoid. Carriers can also be “captives” — essentially a form of self-insurance where the insurer is wholly owned by the insured. Explaining captives could fill a separate post, but if you’re interested in the model you can start your research here.
Attributes to consider:
Revenue Model: Insurance carrier economics can be complicated, but the basic concepts are straightforward. Insurers collect premium payments from insureds, which they generally expect to cover the costs of any claims (referred to as “losses”). In doing so, they profit in two ways. The first is pricing coverage so the total premiums received are greater than the amount of claims paid, though there are regulations and market pressures that dictate profitability. The second is investing premiums. Because insurance carriers collect premiums before they pay claims, they often have a large pool of capital available, called the “float,” which they invest for their own benefit. Warren Buffett’s annual letters to Berkshire shareholders are a great source of knowledge for anyone looking to understand insurance economics. Albert Wenger of USV also recently posted an interesting series that breaks down insurance fundamentals.
Product breadth: Carriers have few limitations on which products they can offer. However, the products you sell affect regulatory requirements, required infrastructure and profitability.
Required capabilities/partnerships: Carriers can market and sell their products using any or all of the intermediaries in this post. While carriers are often the primary risk-bearing entity — they absorb the profits and losses from underwriting — in many cases they partner with reinsurers to hedge against unexpected losses or underperformance. There are a variety of reinsurance structures, but two common ones are excess of loss (reinsurer takes over all payment obligations after the carrier pays a certain amount of losses) and quota share (reinsurer pays a fixed percentage of every loss).
Regulation: I’ll touch on a few concepts, but carrier regulation is another complex topic I won’t cover comprehensively in this post. Carriers must secure the appropriate licenses to operate in each country/state (even non-admitted carriers, which still have some regulatory obligations). They also have to ensure any capital requirements issued by regulators are met. This means keeping enough money on the balance sheet (reserves/surplus) to ensure solvency and liquidity, i.e. maintaining an ability to pay claims. Carriers also generally have to prove their pricing is adequate, not excessive, and not unfairly discriminatory by filing rates (their pricing models) with state commissioners. Rate filings can be “file and use” (pre-approval not required to sell policies), or “prior approval” (rates must be approved before you can sell policies).
In this overview, I did not address a number of other interesting topics, including tradeoffs between group choices. For example, you should also consider things like exit/liquidity expectations, barriers to entry and creating unfair advantages before starting an insurance business. Perhaps I’ll address these in a future post. However, I hope this brief summary sparks questions and new considerations for start-ups entering the insurance distribution value chain.
I’m looking forward to watching thoughtful founders create companies in each of the groups above. If you’re one of these founders, please feel free to reach out!
At American Family Ventures, we believe changes to insurance will happen in three ways: incrementally, discontinuously over the near term and discontinuously over the long term. We refer to each of these changes in the context of a “version’ of insurance,” respectively, “Insurance 1.1,” “Insurance 2.0” and “Insurance 3.0.”
The incremental changes of “Insurance 1.1” will improve the effectiveness or efficiency of existing workflows or will create workflows that are substantially similar to existing ones. In contrast, the long-term discontinuous changes of “Insurance 3.0” will happen in response to changes one sees coming when peering far into the future, i.e. risk management in the age of commercial space travel, human genetic modification and general artificial intelligence (AI). Between those two is “Insurance 2.0,” which represents near-term, step-function advances and significant departures from existing insurance processes and workflows. These changes are a re-imagination or reinvention of some aspect of insurance as we know it.
We believe there are three broad categories of innovation driving the movement toward “Insurance 2.0”: distribution, structure and product. While each category leverages unique tactics to deliver value to the insurance customer, they are best understood in a Venn diagram, because many tactics within the categories overlap or are used in coordination.
In this post, we’ll look into at the first of these categories—distribution—in more detail.
A.M. Best, the insurance rating agency, organizes insurance into two main distribution channels: agency writers and direct writers. Put simply, agency writers distribute products through third parties, and direct writers distribute through their own sales capabilities. For agency writers, these third-party channels include independent agencies/brokerages (terms we will use interchangeably for the purposes of this article) and a variety of hybrid structures. In contrast, direct writer sales capabilities include company websites, in-house sales teams and exclusive agents. This distinction is based on corporate strategy rather than customer preference.
We believe a segment of customers will continue to prefer traditional channels, such as local agents valued for their accessibility, personal attention and expertise. However, we also believe there is an opportunity to redefine distribution strategies to better align with the needs of two developing states of the insurance customer:those who are intent-driven and those who are opportunity-driven. Intent-driven customers seek insurance because they know or have become aware they need it or want it. In contrast, opportunity-driven customers consider purchasing insurance because, in the course of other activities, they have completed some action or provided some information that allows a timely and unique offer of insurance to be presented to them.
There are two specific distribution trends we predict will have a large impact over the coming years, one for each state of the customer described above. These are: 1) the continuing development of online agencies, including “mobile-first” channels and 2) incidental sales platforms.
Online Agencies and Mobile-First Products
Intent-driven customers will continue to be served by a number of response-focused channels, including online/digital agencies. Online insurance agencies operate much like traditional agencies, except they primarily leverage the Internet (instead of brick-and-mortar locations) for operations and customer engagement. Some, like our portfolio company CoverHound, integrate directly with carrier partners to acquire customers and bind policies entirely online.
In addition to moving more of the purchasing process online, we’ve observed a push toward “mobile-first” agencies. By using a mobile device/OS as the primary mode of engagement, the distributor and carrier are able to meet potential customers where they are increasingly likely to be found. Further, mobile-first agencies leverage the smartphone as a platform to enable novel and valuable user experiences. These experiences could be in the application process, notice of loss, servicing of claims, payment and renewal or a variety of other interactions. There are a number of start-up companies, some of which we are partnered with, working on this mobile-first approach to agency.
To illustrate the power of a mobile-first platform, imagine a personal auto insurance mobile app that uses the smartphone camera for policy issuance; authorizes payments via a payment API; processes driving behavior via the phone’s GPS, accelerometer and a connection to the insured vehicle to influence or create an incentive for safe driving behavior; notifies the carrier of a driving signature indicative of an accident; and integrates third-party software into their own app that allows for emergency response and rapid payment of claims.
In the latter of the two customer states, we believe “incidental channels” will increasingly serve opportunity-driven customers. In this approach, the customer acquisition engine (often a brokerage or agency) creates a product or service that delivers value independently of insurance/risk management but that uses the resulting relationship with the customer and data about the customer’s needs to make a timely and relevant offer of insurance.
We spend quite a bit of our time thinking about incidental sales channels and find three things about them particularly interesting:
Reduced transactional friction—In many cases, customers using these third-party products/services are providing (or granting API access to) much of the information required to digitally quote or bind insurance. Even if these services were to monetize via lead generation referral fees rather than directly brokering policies, they could still remove purchase friction by plugging directly into other aggregators or online agencies.
Dramatically lower customer acquisition costs—Insurance customers are expensive to acquire. Average per-customer acquisition costs for the industry are estimated to be between $500 and $800, and insurance keywords are among the top keywords by paid search ad spend, often priced between $30 and $50 per click. Customer acquisition costs for carriers or brokers using an incidental model can be much lower, given naturally lower costs to acquire a customer with free/low cost SaaS and consumer apps. Network effects and virality, both difficult to create in the direct insurance business but often present in “consumerized” apps, enhance this delta in acquisition costs. Moreover, a commercial SaaS-focused incidental channel can acquire many insurance customers through one sale to an organization.
Improved customer engagement—Insurance can be a low-touch and poorly rated business. However, because most customers choose to use third-party products and services of their own volition (given the independent value they provide), incidental channels create opportunities to support risk management without making the customer actively think about insurance—for example, an eye care checkup that happens while shopping for a new pair of glasses. In addition, the use of third-party apps creates more frequent opportunities to engage with customers, which improves customer retention.
Additional Considerations and Questions
The digital-customer-acquisition diagram below shows how customers move through intent-driven and opportunity-driven states. Notice that the boundary between customer states is permeable. Opportunity-driven customers often turn into intent-driven customers once they are exposed to an offer to purchase. However, as these channels continue developing, strategists must recognize where the customer begins the purchase process—with intent or opportunistically. Recognizing this starting point creates clarity around the whole product and for the user experience required for success on each path.
Despite our confidence in the growth of mobile-first and incidental strategies, we are curious to see how numerous uncertainties around these approaches evolve. For example, how does a mobile-first brokerage create defensibility? How will carriers and their systems/APIs need to grow to work with mobile-first customers? With regard to incidental channels, which factors most influence success—the frequency of user engagement with the third-party app, the ability of data collected through the service to influence pricing, the extensibility of the incidental platform/service to multiple insurance products, some combination of these or something else entirely?
Innovation in how insurance is distributed is an area of significant opportunity. We’re optimistic that both insurers and start-ups will employ the strategies above with great success and will also find other, equally interesting, approaches to deliver insurance products to customers.
Insurance M&A activity in the U.S. rose to unprecedented levels in 2015, surpassing what had been a banner year in 2014. There were 476 announced deals in the insurance sector, 79 of which had disclosed deal values with a total announced value of $53.3 billion. This was a significant increase from the 352 announced deals in 2014, of which 73 had disclosed deal values with a total announced value of $13.5 billion. Furthermore, unlike prior years, where U.S. insurance deal activity was isolated to specific subsectors, 2015 saw a significant increase in deal activity in all industry subsectors.
The largest deal of the year occurred in the property & casualty space when Chubb Corporation agreed on July 1 to merge with Ace. The size of the combined company, which assumed the Chubb brand, rivals that of other large global P&C companies like Allianz and Zurich. This merger by itself exceeded the total insurance industry disclosed deal values for each of the previous five years and represented 53% of the total 2015 disclosed deal value for the industry. However, even without the Chubb/Ace megamerger, total 2015 deal value was still nearly double that of 2014.
While the insurance industry saw a significant increase in megadeals in 2015, there also was a significant increase in deals of all sizes across subsectors.
Tokio Marine & Fire Insurance’s acquisition of HCC Insurance Holdings, announced in June 2015, was the second largest announced deal, with a value of $7.5 billion. The purchase price represented a 36% premium to market value before the deal announcement.
The largest deal in the life space (and third largest deal in 2015) was Meiji Yasuda Life Insurance’s acquisition of Stancorp Financial Group for $5 billion. The purchase price represented 50% premium to market value prior to the deal announcement and continued what now appears to be a trend with Asian-domiciled financial institutions (particularly from Japan and China) acquiring mid-sized life and health insurance companies by paying significant premiums to public shareholders.
The fourth and fifth largest announced deals in 2015 were very similar to the Stancorp acquisition. They also were acquisitions of publicly held life insurers by foreign-domiciled financial institutions seeking an entry into the U.S. In each of these instances, the acquirers paid significant premiums.
In 2014, we anticipated this trend of inbound investment – particularly from Japan and China – and expect it to continue in 2016 as foreign-domiciled financial institutions seek to enter or expand their presence in the U.S.
Independent of these megadeals, the overwhelming number of announced deals in the insurance sector relate to acquisitions in the brokerage space. These deals are significant from a volume perspective, but many are smaller transactions that do not tend to have announced deal values.
In addition, there were a number of transactions involving insurance companies with significant premium exposure in the U.S., but which are domiciled offshore and therefore excluded from U.S. deal statistics. Some examples from 2015 include the acquisition of reinsurer PartnerRe by Exor for $6.6 billion, the $4.1 billion acquisition of Catlin Group by XL Group and Fosun’s acquisition of the remaining 80% interest of Ironshore for $2.1 billion.
Inbound foreign investment – Asian financial institutions looking to gain exposure to the U.S. insurance market made the largest announced deal of 2014 and four of the five largest announced acquisitions in the insurance sector in 2015. Their targets were publicly traded insurance companies, which they purchased at significant premiums to their market prices. Foreign buyers have been attracted to the size of the U.S. market and have been met by willing sellers. Aging populations, a major issue in Japan, Korea and China, as well as an ambition to become global players, will continue to drive Asian buyer interest in the U.S. However, the ultimate amount of foreign megadeals in the U.S. may be limited by the number of available targets that are of desired scale and available for acquisition.
Sellers’ market – Coming out of the financial crisis, there were many insurance companies seeking to sell non-core assets and capital-intensive products. This created opportunities for buyers, as these businesses were being liquidated well below book values. Starting in 2014, the insurance sector became a sellers’ market (as we mention above, largely because of inbound investment). Many of the large announced deals in 2015 involved companies that were not for sale but were the direct result of buyers’ unsolicited approaches. This aggressiveness and the significant market premiums that buyers have paid on recent transactions should be cause for U.S. insurance company boards to reassess their strategies and consider selling assets.
Private equity/family office – Private equity demand for insurance brokerage companies continued in 2015, even as transaction multiples and valuations of insurance brokers increased significantly. However, we have also seen increased interest among private equity investors in acquiring risk-bearing life and P&C insurance companies. This demand has grown beyond the traditional PE-backed insurance companies that have focused primarily on fixed annuities and traditional life insurance products. Examples include: 1) Golden Gate Capital-backed Nassau Reinsurance Group Holdings’ announced acquisition of both Phoenix Companies and Universal American Corp.’s traditional insurance business; 2) HC2’s acquisition of the long-term care business of American Financial Group Inc.: and 3) Kuvare’s announced acquisition of Guaranty Income Life Insurance. We anticipate private equity activity will continue in both insurance brokerage and carrier markets in 2016.
Consolidation – While there has been some consolidation in the insurance industry over the past few years, it has been limited primarily to P&C reinsurance. With interest rates near historic lows and minimal increases in premium rates over the last few years, we expect the economic drivers of consolidation to increase in the industry as a whole as companies seek to eliminate costs to grow their bottom lines.
Regulatory developments – MetLife recently announced plans to spin off its U.S. retail business in an effort to escape its systemically important financial institution (SIFI) designation and thereby make the company’s regulatory oversight consistent with most other U.S. insurers’. MetLife’s announcement was followed by fellow SIFI AIG’s announcement that it intended to divest itself of its mortgage insurance unit, United Guaranty. The two other non-bank financial institutions that have been designated as SIFIs, GE Capital and Prudential Financial, have differing plans. While GE Capital has been in the process of divesting most of its financial services businesses, Prudential Financial has yet to announce any plans to sell assets. In other developments, the new captive financing rules the NAIC enacted in 2015 and the implementation of Solvency II in Europe may put pressure on other market participants to seek alternative financing solutions or sell U.S. businesses in 2016 and beyond.
Technological innovations – The insurance industry historically has lagged behind other industries in technological innovation (for example, many insurance companies use multiple, antiquated, product-specific policy administration systems). Unlike in banking and asset management, which have been significantly disrupted by technology-driven, non-bank financing platforms and robo-advisers, the insurance industry has not yet experienced significant disruption to its traditional business model from technology-driven alternatives. However, we believe that technological innovations will significantly alter the way insurance companies do business – likely in the near future. Many market participants are focusing on being ahead of the curve and are seeking to acquire technology that will allow them to meet new customer needs while optimizing core insurance functions and related cost structures.
We expect inbound foreign investment – especially from Japan and China – to continue fueling U.S. deals activity for the foreseeable future. If there is an impediment to activity, it likely will not be a lack of ready buyers but instead a lack of suitable targets.
Private equity will remain an important player in the deals market, not least because it has expanded its targets beyond brokers to the industry as a whole.
The need to eliminate costs to grow the bottom line will remain a primary economic driver of consolidation.
Regulatory developments are driving divestments at most, though not all, non-bank SIFIs. This remains a space to watch, as a common insurance industry goal is to avoid federal supervision.
Actual and impending technological disruption of traditional business models is likely to lead to increased deal activiy as companies look to augment their existing capabilities and take advantage of – rather than fall victim to – disruption.
The excitement around technology’s potential to transform the insurance industry has grown to a fever pitch, as 2015 saw investors deploy more than $2.6 billion globally to insurance tech startups. I compiled six trends to look out for in 2016 in the insurance tech space.
The continued rise of insurance corporate venture arms
2015 saw the launch of corporate venture arms by insurers including AXA, MunichRe/Hartford Steam Boiler, Aviva and Transamerica. Aviva, for example, said it intends to commit nearly £20 million per year over the next five years to private tech investments. Not only do we expect the current crop of corporate VCs in the insurance industry to become more active, we also expect to see new active corporate VCs in the space as more insurance firms move from smaller-scale efforts — such as innovation labs, hackathons and accelerator partnerships — to formal venture investing arms.
Majority of insurance tech dealflow in U.S. moves beyond health coverage
Insurance tech funding soared in 2015 on the back of Q2’15 mega-rounds to online benefits software and health insurance brokerage Zenefits as well as online P&C insurance seller Zhong An. More importantly, year-over-year deal activity in the growing insurance tech space increased 45% and hit a multi-year quarterly high in Q4’15, which saw an average of 11 insurance tech startup financings per month.
In each of the past three years, more than half of all U.S.-based deal activity in the insurance tech space has gone to health insurance start-ups. However, 2015 saw non-health insurance tech start-ups nearly reach parity in terms of U.S. deal activity (49% to 51%). As early-stage U.S. investments move beyond health coverage to other lines including commercial, P&C and life (recent deals here include Lemonade, PolicyGenius, Ladder and Embroker), 2016 could see an about-face in U.S. deal share, with health deals in the minority.
Investments to just-in-time insurance start-ups grow
The on-demand economy has connected mobile users to services including food delivery, roadside assistance, laundry and house calls with the click of a button. While not new, the unbundling of an insurance policy into financial protection for specific risks, just-in-time delivery of coverage or micro-duration insurance has already attracted venture investments to mobile-first start-ups including Sure, Trov and Cuvva. Whether or not consumers ultimately want the engagement or interfaces these apps offer, the host of start-ups working in just-in-time insurance means one area is primed for investment growth in the insurance tech space.
Will insurers get serious about blockchain investments?
Thus far, insurance firms have largely pursued exploratory investments in blockchain and bitcoin startups. New York Life and Transamerica Ventures participated in a strategic investment with Digital Currency Group, gaining the ability to monitor the space through DCG’s portfolio of blockchain investments. More recently, Allianz France accepted Everledger, which uses blockchain as a diamond verification registry, into its latest accelerator class. As more insurers test blockchain technologies for possible applications, it will be interesting to monitor whether more insurance firms join the growing list of financial services giants investing in blockchain startups.
Fintech start-ups adding insurance applications
In an interview with Business Insider, SoFi CEO Mike Cagney said he believes there’s a lot more room for its origination platform to grow, adding,
“We’re looking at the entire landscape of financial services, like life insurance, for example.”
A day later, an article on European neobank Number26, which is backed by Peter Thiel’s Valar Ventures, mentioned the company would like to act as a fintech hub integrating other financial products, including insurance, into its app. We should expect to see more existing fintech start-ups in non-insurance verticals not only talk publicly but also execute strategic moves into insurance.
More cross-border blurring of insurance tech start-ups
Knip, a Swiss-based mobile insurance app backed by U.S. investors including QED and Route66, is currently hiring for U.S. expansion. Meanwhile, U.S. start-ups such as Trov are partnering and launching with insurers abroad. We can expect more start-ups in the U.S. to look abroad both for strategic investment and partnerships, and for insurance tech start-ups with traction internationally to expand to the U.S.