Analysts at PwC have forecast that mergers and acquisitions (M&A) in the re/insurance sector could be set to slow in response to inflationary and interest rate challenges, but have added that this could also create the conditions for deals at more attractive terms.
Overall, PwC expects M&A deals across all financial industries to rise in 2023 despite headwinds, as investors and executives look to balance short-term risks with their long-term business transformation strategies.
The broker’s Global M&A Industry Trends Outlook concludes that deals still present a desirable way for financial services firms in particular to boost digital capabilities, counter the disruption from platforms and fintechs, and address sustained pressure from regulators.
However, dealmakers nonetheless face challenges from the current uncertain macroeconomic market environment, including slowing GDP growth, inflation, higher interest rates and disruption resulting from the Russia– Ukraine conflict, and fallout from cryptocurrency failures.
Other factors compounding these challenges include supply chain disruption, competition for highly skilled talent, and accelerated digital and cloud transformation.
For insurers and reinsurers specifically, PwC highlighted the problem of premiums lagging behind inflation rates, particularly in the property and casualty space where companies face strong product pricing challenges.
Additionally, analysts observed that high inflation in goods and services is driving up costs of personal insurance claims, with the non-life segment again more affected than the life segment, especially through property and motor claim costs.
And on a similar note, operational expenses are increasing because labour costs, a key component of insurers’ operational expenses, are being driven up further by wage inflation.
Other issues for insurers flagged by PwC include changing policyholder preferences, which may result in higher demand for products supported by higher interest rates, such as guaranteed savings.
“The need to accelerate transformation for insurers is critical,” commented Matt Britten, Partner, Insurance at PwC Bermuda. “In this challenging environment, it is time for insurers to clearly define their core business and decide which business areas will drive future growth and should be retained, and which to exit or dispose of, with the aim of deriving the greatest value from the divestment.”
He added: “M&A tends to slow during times of uncertainty or market volatility – but those can be precisely the times when valuations become more attractive and opportunity knocks.”
PwC further predicts that strong M&A activity will be realised in the insurance broker sector, although it also warned of the growing risk of disintermediation as rapid interest rate rises may result in policyholders surrendering policies faster.
On this point, analysts highlighted examples of several insurance brokers held by founding and private owners, or representing the acquisition platform for private equity firms, who are already in the process of significantly consolidating the market of small, mid-tier and peer-sized players.