October 10, 2018
The Coming Wave of M&A
by Paul Carroll
While speaking this week at a PwC conference for members of the board of directors of financial services companies, I heard quite a bit of buzz about the likelihood of a wave of M&A for insurance companies and about an intriguing maneuver that could let insurers free up capital. Following the principle of Scott Van Pelt, who begins each broadcast on ESPN with “the best thing I saw today,” I figured I should share.
The feeling about the need for consolidation was so strong that one person asked whether an insurer might hit the roughly 20% market share that Allianz has in Germany, getting so big that federal regulators would need to assert themselves and sideline the states.
The assumptions about consolidation began with the understanding that other industries tend to coalesce around a few giants, while there are thousands of players in the insurance industry, but the thinking went much further. There was a lot of talk about new FASB regulations that will tend to reward size.
In addition, if you believe, as I do, that every industry becomes a technology business over time, you have to assume that the insurance industry will show more of the winner-takes-all characteristics of the technology world, where there is one Google, one Apple, one Facebook and one Amazon. Once someone gets a digital platform right, it costs nothing to add more partners and customers, so competitors fall by the wayside, and many are more than happy to sell.
Even short of buying and selling companies, a PwC partner laid out an approach called Insurance Business Transfer (IBT) that is about to take effect in Oklahoma and that she thinks could spread across the country. The basic idea, which draws from a law in the U.K., is to transfer runoff business into a new entity and free up capital. Courts need to approve the transfer, but, crucially, approval from individual policy holders is not required. The law takes effect Nov. 1, and, if it withstands the inevitable legal challenges, could allow considerable restructuring even short of M&A. A much more limited form of the IBT approach exists in Connecticut, and a more modest form of the Connecticut law has been around in Pennsylvania since at least the 1990s.
Thanks to PwC for including me. It’s always nice to find an excuse to get back to New York.
Have a great week.