Insurance companies, because of market instability and increasing competitive demands, are choosing alliances, partnerships and outsourcing over traditional corporate restructuring strategiessuch as mergers and acquisitions, according to new research from Accenture (New York).
Thirty-six percent of CEOs, COOs and CFOs at 68 insurance companies in 16 countries indicate that the most likely restructuring will be Capability-Based Restructuring (CBR) vehicles, or joint ventures, strategic alliances or co-sourcing, with 33 percent saying that outsourcing, in-sourcing or net-sourcing will be most likely. One of the strongest focuses of restructuring will be on IT.
"We saw a number of new alliances emerging and we wanted to see if there was a new trend emerging," says London-based Dee Lehane, global managing partner, insurance industry group, Accenture. "We wanted to know if there was support behind the trend and if it would accelerate and we found that it is."
Lehane says that insurance companies are turning away from traditional M&As for a number of reasons. "There are many issues with M&As," she says. "Although the books of business may be relatively cheap to acquire, in many cases the acquiring company's stock price is also low. Also, the deals are difficult to do and the volatility in the market makes it very hard to gauge a stock's value right now. Not to mention the difficulty of merging two companies' cultures and systems, which can take a long time."
The research also shows that a major driver behind the shift to alternative forms of restructuring is a focus on cost, according to Lehane. "Forty percent said that the main objective is to reduce costs, while 26 percent were focused on market share," she says. "In the current environment, cost is a very big focus. Since insurance companies make most of their money from investments, the recent gyrations in the markets are really hurting insurance companies."
Insurance companies are also looking to restructure the maintenance of policy administration systems and possibly the manufacturing of insurance products, with co-sourcing or outsourcing likely alternatives, Lehane says. Another area where insurance companies are looking for alternative restructuring methods is in channel development. "Carriers are looking for broader access to distribution, so an alliance or co-venture focused on distribution will be a major focus as well," she says.
In the survey, only 18 percent of executives rated M&As as the most likely form or restructuring for their company, although 97 percent expect restructuring to continue in the insurance industry. Nearly 90 percent of respondents say they are specifically planning to undertake Capability-Based Restructuring (CBR) initiatives within the next few years. Factors driving CBR include traditional competition (20 percent), more sophisticated customers (19 percent) and shareholder demands for improved return (15 percent). "Insurers are using CBR to identify the distinctive capabilities they require to grow their business and add value to their customers," according to Lehane.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio