Novarica has seen notable transaction activity on the insurer side in recent years as they merge, buy, and sell units to expand business capabilities. Many similar transactions are taking place in the insurance software vendor space as solution providers adapt to meet their clients’ needs.
Growth strategy drives vendor M&A activity
The need to scale can drive M&A strategy in the insurance software business. The at-times fragmented nature of the insurance marketplace can mean that vendors can address growth goals with horizontal acquisition strategies that create functional breadth. M&A can also be a diversification strategy to support additional sectors and functions. Some acquisitions can be primarily about acquiring customers.
For solution providers, diverse capabilities aren’t just about the line of business; they’re also about the size of the target insurers. Insurers have different cultures and sizes; they need different support and customization. Some vendors have developed multiple systems for the same line of business to accommodate various scenarios. In other instances, solution providers can find it more efficient to acquire capabilities that allow for brand extension into new markets or segments. The motivations behind transactions can be a critical factor for CIOs and their insurer IT organizations to consider.
Private equity investment impacts the vendor space
Dominant insurance software vendors are acquiring small, innovative players to maintain or enhance market position. Private equity companies are searching for new capabilities to build up strong competitive plays in the insurance technology space, allowing them to quietly position themselves as alternatives to large, traditional, publicly traded companies. Some recent acquisitions have focused on the analytics arms dealer and beneficial bots space. Data giants are also coming into the industry. It will be important for insurers to monitor how software vendors, financial investors, and tech/data companies interact going forward.
Private equity investments can imply different types of acquisition plays. In some instances, they are about building broader, market-facing capabilities. Others prioritize short-term realization of value from investments without a long-term roadmap for enhancing a company’s assets. For CIOs on the “buy” side of the table looking at options, it is vital to know the track records of the solution providers and investors. The past is not a perfect predictor of the future, but it can provide some very strong indications of direction.
Insurers can mitigate risk with DR/BC planning concepts
Vendor M&A activity can have a significant impact on insurers. Insurers need to understand what position the vendor has in the ecosystem and prepare for changes to its strategy. Understanding the product roadmap and the relative strengths and weaknesses of the products it will offer can help insurers understand the risk profile.
As odd as it can sound, planning for an exit strategy even before signing a contract with a vendor can also help insurers mitigate risk. Considering an exit strategy does not necessarily mean that the insurer has issues with or is skeptical of the new partner. Rather, it recognizes that the useful life of all technology is getting shorter. The hope might be for a long-term investment, but other factors, including an unexpected change in control, can impact any utilization trajectory.
The goal of disaster recovery and business continuity planning is to “hope for the best and plan for the worst.” This mantra can also be an effective risk mitigation play. Insurers should also think about developing best practices around data migration and data backup (just in case).
A full Novarica brief on Solution Provider M&A Trends can be found here. A recording of this webinar can be accessed here. The next Virtual Panel Discussion takes place on Tuesday, April 27 at 1 PM ET, focusing on the future of Agile after the pandemic. More details and registration for the session can be found here.
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