This perspective is part of our collection of content on Leading in the Age of Acceleration.
We recently shared 10 ways insurance executives should be positioning their organizations in 2023 — to stay relevant and navigate in this increasingly volatile environment. In this note, we’ve double-clicked on a subset of the “10 To Do’s” that we consider most relevant for those private equity (PE) investors already in, or considering an investment in the insurance sector.
1. Modularize for growth
An increasingly fluid market environment demands a more fluid ecosystem — inflation is forcing insurers to optimize costs, managing general agents (MGAs) are gaining scale and traction, and plug-and-play infrastructure providers are commoditizing data and technology. These trends provide a transformative opportunity for insurers to modularize their organizations for growth.
CEOs need to focus capital and resources on their firm’s most valuable “crown jewel” capabilities and build an ecosystem of partners around these core activities. Successful modularization requires an unbiased appraisal of where one’s unique advantage lies and what it takes to maximize the value from “owning” certain value chain components — while assembling a powerful ecosystem around it. Select platform-based insurance models have emerged, including in the Web3 space, which may provide a preview of where the market may be headed… fast.
Implications for private equity investors. Many private equity (PE) investments are platform assets, followed by an aggressive bolt-on acquisition strategy. Delivering a successful post-acquisition integration and having the ability to streamline product offerings and pricing models is important. Retaining distinct product identities with a strong reputation in the market can also provide downside protection when customers are looking to ‘unbundle’ solutions or buy best-of-breed solutions. We believe sponsors need a clear go-to-market proposition with the ability to match individual product features to specific client pain points — rather than trying to be everything to everyone.
2. Triple down on escaping legacy
Modernize your tech stack to support portfolio company growth. An inability to escape legacy technology has been a perennial issue for most insurers. This challenge is often quoted as the biggest reason behind the industry’s slow speed to market and difficulty in scaling disruptive technology. Modularization, risk fluidity, and macro resilience all require modern technology infrastructures. As such, CEOs must triple down on sunsetting legacy through use of rapid transition solutions, which are now available.
Implications for private equity investors. Legacy technology is one of the key barriers to innovation and driving efficiency improvements. In a recession or softer insurance market, carriers will face topline pressure and need to be extra careful to avoid cost leakage. Yes, investing in state-of-the-art technology and systems comes with substantial cost upfront but the return on investment (ROI) is substantial and often timely (especially if carriers move to SaaS-based solutions with reduced implementation timelines). We believe sponsors can benefit by leveraging technology to support growth in their portfolio companies. For example, agency management system (AMS) software for brokers, policy administration systems (PAS) for carriers, or target investments in vendors.
3. Predict and prevent
Move beyond risk transfer to prevention to maximize customer lifetime value. Moving into profitable ancillary services across risk prediction, prevention, and response is a natural evolution for the P&C industry with several insurers embracing it as the new normal. Some incumbents, for example, are introducing digital assistants with an integrated front-end combining insurance and services offerings for home, health, and travel. Digital-native players offer sensors and home maintenance services to their customers to drive customer stickiness and lower claim costs. These services can be more profitable than traditional insurance products and are highly complementary to existing offerings. Given the range of competing models, the winners will be those who effectively tie a ‘predict and prevent’ strategy to their customers’ key underserved needs.
Implications for private equity investors. The volume of data and speed of insights required to execute against a ‘predict and prevent’ strategy represents a massive change in the capabilities and organizational clock speed of the insurance industry. This creates opportunities for partners who can assemble the pieces and integrate with carriers trying to execute their strategy. For example, telematics data and services vendors with plug-and-play solutions for insurers that are seeking to offer personalized solutions for customers. We believe the key to success is the ability to onboard new customers, which requires a mix of service and solutions capabilities and/or a robust network of implementation partners. The quest to be a SaaS-only solution can lead to broken promises and dissatisfied customers.
Oliver Wyman’s work for private equity investors is informed by the wide-ranging strategy, operations, risk and capital management, and actuarial work we do for industry incumbents and challengers — across the property & casualty, life & annuity, and accident & health industry segments. We offer unparalleled depth and breadth of experience to insurance sector investors. Please reach out to learn more.