Ripples From Software M&A Can Buffet Insurers
Selecting a software solution is a long-term business commitment. That’s why understanding a vendor’s footing in the M&A market is essential.
- Matthew Josefowicz
- May 2021
Insurance is a fragmented industry, which means growth-oriented software vendors will always be looking for ways to expand their offerings to increase overall market share. Accordingly, mergers and acquisitions are a defining feature of the insurance software marketplace, rather than an occasional disruption.
For insurance technology leaders, active investment and M&A activity is a mixed blessing. On one hand, new and innovative solutions are coming to market and getting the backing they need to grow and mature. On the other hand, disruption risk is increasing as vendors may be acquired or be subject to changing product strategies following an acquisition.
Insurance is an information business—and it depends on information technology to communicate with partners and clients, evaluate risk, and operate efficiently. Insurers should keep an eye on M&A market dynamics, especially for core systems. Understanding major market participants and their activity can be helpful in formulating an approach to potential M&As. Some of the major participants include:
Insurance Software Vendors: Publicly traded and large, private-equity-backed, full-suite insurance software vendors are active strategic acquirers in this marketplace. No major player has changed hands in the past two years, but it's always possible that a tech giant could acquire one of these companies as part of an industry expansion plan.
Tech and Data Giants: Platform giants (AWS, Microsoft, IBM) don't offer vertical solutions, but they do nurture relationships with insurers. Data giants (Verisk, LexisNexis, CoreLogic) have largely stayed away from insurer software acquisitions, with the exception of Verisk acquiring FAST and Sequel. Application and service giants (DXC, Salesforce, Accenture) have a history of acquiring and bringing vertical solutions to market.
Private Equity and Venture Capital: Private equity has been active in the insurance software marketplace for at least two decades, whether through engineering transactions or acquisitions, privatizing public companies, investing in growth companies, or operating a holding company. Venture capital investor interest also has grown, thanks in part to insurtech, which is adjacent to the insurance software marketplace. Insurers have also set up their own VC arms, often investing in startup software companies as well as distributors and carriers.
Working with an acquiring vendor means understanding product road maps and how acquisitions will enhance or replace existing solutions. Conversely, working with an acquisition target will require a sense of how the company might be viewed by potential investors or acquirers.
Making a Choice
For insurers, selecting an insurance software solution is usually a long-term decision that depends as much on the current state as it does on the future road map. An acquisition thesis for key partners and suppliers can help to navigate potential M&A impact. More specifically, determining how a vendor is likely to be viewed by the larger market is an important consideration for insurers.
Is a chosen vendor likely to be the acquirer or acquiree? Is the chosen system likely to be acquired for the software and therefore a continued R&D investment? Or will a future buyer only care about the client base, and therefore the insurer will be forced to migrate to a different platform?
Working with an acquiring vendor means understanding product road maps and how acquisitions will enhance or replace existing solutions. Conversely, working with an acquisition target will require a sense of how the company might be viewed by potential investors or acquirers. Insurers also may find it valuable to invest in newer entrants that could eventually be acquired. This allows some degree of control as well as insight into future M&A activity.
Investment and acquisition also affect pricing and contracting. Vendors with new owners may become more revenue-focused than relationship-focused, which may lead to more-aggressive pricing. This pivot in approach may be especially jarring for insurers used to working with an accommodating founding team. Acquiring companies also may increase prices to reflect enhanced service and base products. The increase in fees may be worth it for insurers, especially those who have spent years running a poorly supported product.
No matter what an insurance software vendor says, pricing is negotiable, and few vendors want to risk losing a customer or suffering reputational damage. Insurers have power in these new relationships, and it's possible to work toward a win-win deal structure with new partners.
Big exits, investor excitement and global economic uncertainty mean M&As will continue to increase in the coming years. Insurers of all sizes can benefit from understanding M&A market dynamics, whether to inform decisions around supporting current systems or to make strategic investments in emerging ones.
Best’s Review contributor Matthew Josefowicz is president and CEO of Novarica. He can be reached at email@example.com.