The drumbeat for InsurTechs to pursue a merger, acquisition or partnership is getting louder, with the number likely to substantially grow in the months ahead, an insurance industry expert believes.
“InsurTech is reaching a point where [startups] must decide whether they are better off on their own or need to find a partner,” said Adrian Jones, SCOR’s Deputy CEO of P&C Partners in charge of Ventures & Strategic Partnerships.
Jones, speaking during a session for InsureTech Connect’s ITC Global virtual annual meeting, predicts that these arrangements will happen a variety of ways: between two InsurTechs, InsurTechs sold to incumbents [older carriers] or with InsurTechs buying troubled assets themselves.
“The bottom line—if you’re not discussing M&A, it is a great conversation to start to have,” Jones said.
The reason why, according to Jones: startups reach a point in their development where they pursue growth that builds on, and adds to the capabilities they started with.
According to Jones, the same rules apply to InsurTech startups as for older insurers.
“Ultimately, M&As are driven by companies seeking more growth than the market provides … businesses are ultimately collections of people, and people want to grow,” Jones said. Similarly, he noted, startups are going to also pursue growth by accessing new markets through M&A, and build their capabilities in the process.
The COVID-19 Factor
While InsurTechs—many launched over the last few years— may be organically reaching the point of M&A or a partnership, Jones said that the COVID-19 pandemic is accelerating the process.
Acquirers, he said, “are starting to see the value of InsurTech during COVID,” a period where customers rapidly began leaning heavily on all things digital rather than in-person transactions.
A number of acquisitions have already closed in recent months, conducted by startups including Buckle, Coalition and Hippo. In those situations, “these are deals where incumbent assets have been sold to startups who are using them aggressively to build out new businesses,” Jones said.
He added that this type of M&A is letting InsurTechs accelerate their market presence and exploit the “cost-of-capital” advantages.
For incumbents, or older school insurers, Jones said the argument for them to buy an InsurTech startup can be more varied. If nothing else, he said, incumbents can pursue an InsurTech acquisition to outsource tech and other improvements they’d traditionally pursue on their own.
“Incumbents have cash and aren’t necessarily spending enough on internal R&D; they need growth and capabilities and [are] realizing these young companies have something real and it is worth paying for,” he said.
Good Merger Candidates Talk About It Often
Companies that are good merger initiators look at the possibility often, Jones said.
“This is a boardroom issue,” Jones said. “The best acquirers and I would argue the best sellers of particular assets or companies—they regularly discuss the M&A at the board, either as part of an annual strategic review, or [for startups] even as a regularly quarterly topic.”
Startups in particular should screen for merger capabilities and assets among possible incumbent partners, he said.
“These are tricky boardroom conversations,” he said, noting that talking about a possible M&A transaction is a big deal regardless of company size. “but they can also be highly productive discussions when they lead to blue sky thinking about the future of our industry.”