Competitive and Regulatory Pressures Will Drive Insurance M&As: KPMG Survey

Insurers will also be making investments in technology to adapt to the changing business environment, the consultancy found.

Insurance companies across lines of business are likely to explore mergers and acquisitions as a result of pricing pressures and regulatory uncertainty, according to research from New York-based audit, tax, and advisory firm KPMG.

The KPMG Insurance Industry Pulse survey, conducted in June 2011 with responses from 100 senior insurance executives, found nearly two-thirds saying their companies will be involved in a merger or acquisition as a buyer or seller in the next two years. Frequently cited reasons for exploring M&C included pricing pressures (59%) and regulatory and legislative pressures (41%).

"Quite frankly, organic growth in the US is very difficult right now," says Laura Hay, national leader of KPMG LLP's insurance practice. "In the near term, what we expect is a pickup in strategic acquisitions. Companies are going to divest out of non-core businesses, and look for product synergies."

There is also potential for larger-scale acquisitions, because many insurance companies have a lot of cash on their balance sheets, Hay adds. Thirty percent of executives surveyed said the highest-priority use for that capital will be a strategic acquisition for their company. The next-most popular response to that question, however, was technology investment, with 20% of respondents naming that as a priority for cash on hand. However, these two points aren't necessarily mutually exclusive, Hay notes.

"As companies invest in technology and drive some of their operating efficiencies, there's a bigger chance to see some bigger deals down the road," she explains. "I think it's possible you'll see bigger companies, with fewer lines, focused on their core. I think you're going to see investments in technology to drive some of those synergies."

Hay expects insurance carriers to focus technology investment in six areas, listed below with her comments:

Operating efficiencies: "That's streamlining claims or underwriting processes."
Finance transformation : "Being able to gather financial info in an even more timely manner."
Consolidating legacy systems : "There are numerous companies that grew through M&A activity in the past, and they'll be moving toward more efficient solutions."
Improving analytics: "As companies look to compete, they'll be improving their analytics for better decision-making."
Data mining : "Some larger companies have tremendous amount of data. We've already seen some interesting data mining activity in P&C."
Regulatory response "The uncertainty [around regulation] means companies want to be more efficient in that space."

It's the last point where all these moving parts come together, Hay says. With healthcare reform demanding some changes in analytics and information that those insurers put together; questions over what the Dodd-Frank-established Federal Insurance Office will demand; and a recent NAIC task force on solvency modernization requiring enhanced reporting and modernization efforts, some M&A activity could be driven by a need to implement compliant technologies out of the reach of some smaller carriers.

"Especially in the P&C industry, there's a lot of specialty and small niche players," she says. "As the regulatory environment gets more complex, they may not be able to keep up."

Despite these pressures, as a whole, the industry remains cautiously optimistic, Hay concludes. Fifty-seven percent of those polled expect better economic conditions and 44% say they plan to add personnel. In addition, 50% said their company's current revenue is higher than last year and 70% anticipate that their revenue will be higher one year from now.

Nathan Golia is senior editor of Insurance & Technology. He joined the publication in 2010 as associate editor and covers all aspects of the nexus between insurance and information technology, including mobility, distribution, core systems, customer interaction, and risk ... View Full Bio