Insurance industry M&A activity is on a temporary break due to uncertainties created by the COVID-19 pandemic, according to a new Deloitte report.
“COVID-19 has forced many insurance carriers to hit pause on new M&A activities and focus on preserving capital,” the Deloitte “2020 Insurance M&A Midyear Update” concluded.
At the same time, the property/casualty insurance price hardening in the U.S. commercial insurance sector should help carriers plot longer-term stability as the pandemic continues, Deloitte said.
According to Deloitte, the price increases create what “may be an optimal time for carriers to reevaluate their product and service portfolio and plot the path of greatest organic growth.”
The risk, however, is that insurers may not act fast enough to capitalize on those price increases. Deloitte noted that hardening markets are not infinite, so it urged carriers to keep strategizing about profitable growth during this period.
Disruption Could Create M&A Pressures
Even as carriers to seek to preserve capital, the pandemic has unsettled nearly every aspect of their business models. Deloitte explains in its report that the pandemic-related economic shift over the last six months could have a long-lasting effect on the P/C insurance sector in areas including rebates, exposure, cost trends, or new interpretations of coverage language.
In other words, turmoil will be the name of the game, Deloitte said.
“As insurance carriers assess how to manage coverage exclusions related to viruses like COVID-19, the pandemic will likely disrupt investments, finance and capital, underwriting, claims and actuarial functions due to catalytic events relating from the closure of non-essential businesses to changes in state and federal regulations,” Deloitte said.
Before the pandemic, Deloitte had predicted insurers would pursue M&A activity in large numbers over the next two years. While the pandemic has temporarily paused those plans, Deloitte said pandemic disruptions could produce M&A opportunities in the longer term.
That’s because as pandemic pressures increase, Deloitte said carriers may need to consider “radical actions” such as the sale of distressed assets in order to “salvage value from loss-making divisions and preserve the viable core business.” Companies in this situation that are otherwise financially sound could easily turn to mergers and acquisitions in order to “safeguard their customer base and accelerate long-term transformation of their business model,” Deloitte said.