At a time when InsurTechs face major headwinds and incumbent insurers benefit from market tailwinds, it’s time for the traditional insurers to make bold strategic moves, McKinsey partners said in a December 2022 article.
Today’s market dynamics “have effectively turned the tables,” wrote Doug McElhaney and Jason Ralph in their article, “Opportunities for insurers in a rapidly shifting insurtech market.”
After reviewing the plummeting valuation figures for a cohort of InsurTechs—with September 2022 values of P/C InsurTechs Root, Hippo and Lemonade, for example, all down around 90 percent from all-time highs, and Duck Creek down 80 percent—the authors note the promising conditions facing incumbents. In particular, rising interest rates and hard markets are buoying traditional carriers, they wrote noting that in the prior decade incumbents struggled to earn their cost of capital.
Drawing from learnings derived from a study of all types of public companies in the wake of the 2007–08 financial crisis, the McKinsey article notes that a performance gap between winners and the losers grew wider in the immediate aftermath of the crisis and into the next decade. The winners, referred to by the authors as “resilients,” made “fast, decisive moves on productivity” during the downturn and pursued M&A strategies, including proactive divestments and acquisitions to reshape portfolios.
For insurers specifically, the McKinsey partners point to talent and technology acquisitions as ways to boldly support business-building strategies and capitalize on valuation pressures of InsurTechs.
There are opportunities now to transform talent structures by attracting more digital and analytical talent that was initially drawn in the direction of InsurTechs. As those InsurTechs are forced to downsize and as their valuations sink, “acqui-hire” possibilities may also emerge, the article suggests, referring to the prospect of acquiring a company to recruit its staff.
In terms of tech, the article advises incumbents to “be aggressive in procurement.” Noting that InsurTechs have moved away from initial ambitions of being disruptive toward new goals of becoming cooperative partners with existing carriers—”63 percent of InsurTechs enable the value chain and cooperate” by McKinsey’s count—the headwinds facing InsurTechs now also work in favor of incumbents. Specifically, since InsurTechs are facing both a scarcity of capital and an urgency to deliver profitable results, “insurers could have their strongest negotiating position in years with many of their current digital and technology vendors,” the article says.