Insurance groups take a portfolio approach to growth

in Financial Services, 26.05.2016

One feature of the latest edition of Frontiers in Finance that caught my eye was an article urging insurers to take a portfolio approach to growth.

The background – it is not news, but it is worth dwelling a moment on the current environment facing – to a greater or lesser extent – all insurers, be they focused on non-life, life or reinsurance. The impact of new technology (or in the mean time maybe not so new), low interest rates, depressed premium rates, new mega-risks – all of these give the doom-mongers the upper hand over the optimistic! Margins will remain under pressure.

The action needs to be bold – many insurers are carrying businesses that are under-performing, subscale or merely distracting, and the management challenge is to develop a fix, close or sell strategy that then leads to rapid execution. Taking an overall portfolio approach will lead to clearer decisions.

Grow or Go: Time for bold decisions

Where the assessment of non-core assets leads to a GO approach, then we observe that the attendant divestment process has changed.  Previously, selling a business might involve a rigid auction process based on standard checklists and documents; now, most recognize that a more bespoke and focused approach to divestment is largely influenced by four key factors: economic conditions, sellers taking control, wider buyer populations, and business model changes. The practical tips we offer for a successful divestment process include dealing only with credible bidders, anticipating the ‘value chips’ (the issues or uncertainties that bidders could use to negotiate the price), and managing the ‘soft’ issues like the required skills, agility and capability to get the deal done.

Where managements conclude that a GROW approach is best, what we see is that the nature of deal activity is also changing.  In a post-solvency 2 world, activity may increasingly be built on partnerships to support and develop innovation, and joint ventures and alliances that bring together complementary skill sets (such as behavioural analytics capabilities to support sales and product development). Understanding and capturing the benefits of innovation are critical imperatives.

Our message is, ‘be bold’. Insurers can no longer afford to sit on businesses that are not delivering value; they must make tough decisions, and then execute on them in order to win in this environment.

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