7 minute read 30 Apr 2020
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How COVID-19 will impact M&A in the insurance sector

By David Lambert

EY Global Insurance Strategy and Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.

7 minute read 30 Apr 2020

The crisis will intensify and accelerate trends that were driving consolidation and change how insurers assess their M&A options.

The COVID-19 pandemic has had a significant impact on the entire insurance industry. The top priorities have rightly been meeting the immediate-term needs of customers, ensuring operational resilience and protecting solvency.

Despite the sense of near-term urgency, insurers are already thinking about the long-term implications. In many ways, the COVID-19 pandemic will accelerate trends already underway. That is likely to be true of ongoing industry consolidation and other mergers and acquisitions (M&A) activity.

In this article, we explore the impact on M&A in the insurance industry, focusing on two primary questions:

  1. Will the COVID-19 crisis significantly change the type of deals and quantity of M&A?
  2. Will M&A processes, and the way that insurers assess transactions, change as a result?

Our view is that the COVID-19 crisis by itself will not trigger significant levels of M&A activity during the short to medium term. However, the pandemic is intensifying the spotlight on the same structural weaknesses in the insurance sector that have driven consolidation and other M&A activity in recent years. As such, the crisis could accelerate underlying M&A trends, including consolidation. 

Large-scale transactions are possible, although the difficulties in executing deals during uncertain times are not to be underestimated: those challenges range from the need for clear messaging to customers, regulators and other stakeholders, to the complexity of making decisions when many variables are unknown. 

At the very least, the minds around the board tables of many insurers will be focused on disposing non-core and legacy businesses. The need to transform core businesses faster, potentially via M&A, will also be high on the strategic agenda.

Impact of the crisis on M&A activity

In the short term, M&A activity will be very heavily constrained, not least because of the extreme difficulty of valuing assets when the economic outlook, future consumer behavior, and the timing of recovery are all uncertain. However, we see several drivers of M&A as the sector starts to move beyond the “now” and into the “next and beyond.” (EY uses the “now, next, beyond” framework to consider the impact of societal, macroeconomic and technology trends on various industries and how companies should prioritize their action plans.)

Increased M&A activity in recent years has been a result of ongoing transformation in the industry:

  • Disposal of legacy and non-core insurance businesses and portfolios. This has led to the rise of specialist consolidation vehicles that can achieve the expense and capital synergies required to manage such legacy business on an economic basis
  • Sector consolidation, driven in large part by insurers’ realization that companies with greater scale and the ability to invest in digital capabilities and new value propositions, have an advantage
  • The rise of new insurance ecosystems and recognition that future propositions and distribution routes will involve collaboration across current and emerging value chains

As with other business trends (including remote working and the imperative for companies to demonstrate their social purpose), the COVID-19 crisis is “turning up the heat” on the forces driving M&A in insurance. 

Disposing of legacy businesses

The crisis has highlighted the serious threats to resilience posed by insurers’ operational complexity and inflexible systems. Thus, it underscored the need for simple, agile and modernized systems and will accelerate the trend toward disposal of legacy businesses.

Based on the idea that organizational simplicity enables operational simplicity, insurance leaders will increasingly look to dispose of older and legacy businesses or portfolios that are not essential to their forward-looking value propositions.

Sector consolidation

The insurance sector will continue to be well-capitalized overall, although management teams are expected to take extensive actions to preserve and bolster capital levels through the ongoing crisis. The extent of such capital actions, including capital raising, will depend upon the duration and severity of the crisis. While capital pressures could be intense for specific insurers or markets, we do not expect to see large numbers of mergers driven primarily by capital or liquidity stress. There are likely to be exceptions, however. For instance, rating agency downgrades for insurers in those market segments that depend on rating levels could trigger urgent M&A.

Most insurance segments have seen significant consolidation – in some cases rapid consolidation – in recent years. The general trend is that larger, market-leading insurers have the breadth and budgets to invest in new technologies and new ways of working to strengthen their competitive positioning.

Further, such consolidation may be triggered coming out of the COVID-19 crisis, as movements in relative company valuations lead some insurers to consider the acquisition of competitors. Such M&A will be driven largely by the extent to which “the playing field is tilted” – that is, the relative negative and positive changes in valuation and competitive position experienced by individual insurers. Early preparation for such situations (by potential acquirers and targets) will be critically important given the complexity in strategic decision-making during and after the crisis.

Potential distress across the industry ecosystem 

While we do not anticipate large numbers of distress-related transactions, the risk of liquidity stress across the wider insurance value chain will increase the likelihood of urgent capital raises and, potentially, takeovers.

Insurance brokers are likely to experience greater liquidity stress than insurance underwriters, largely due to brokers’ lower levels of cash reserves. In some segments, the financial position of brokers could be hurt by major insurers’ actions to demonstrate fair treatment of customers (e.g., premium rebates and premium holidays). There is, therefore, a risk of unintended consequences; actions taken by insurers or other industry participants could tip other companies into financial distress. Of course, stronger brokers may see an opportunity for acquisition or consolidation. Other investors (including private equity) are positioned to bring needed liquidity and capital to struggling companies.

We see a great demand for InsurTech solutions coming out of the crisis, as companies seek to accelerate their digital initiatives and develop more resilient and flexible ways of interacting with customers. However, in the short term, InsurTechs may face liquidity challenges as discretionary spending is curtailed. InsurTechs’ move away from industry disruption to extensive collaboration with insurers has increased their vulnerability. Some InsurTechs (and other service providers) will need capital raises in the near term and see higher levels of investor appetite in the medium and longer terms as businesses recover.

Impact of the crisis on the M&A assessment process for insurers

Lessons learned during the COVID-19 crisis will affect the nature of M&A activity for years to come. As they evaluate acquisition targets, insurers will focus on: 

  • Operational resilience: When assessing targets in the future, insurers will focus on how their systems and processes reacted during the crisis. Insurers will be wary of taking on any business that presents risks to the resilience of the overall operational environment. 
  • Social purpose: The insurance sector’s role in society has become a hot topic among industry leaders and in the media. Environmental, social and governance (ESG) criteria have increasingly informed investment strategies and decision-making – a trend likely to accelerate in the COVID-19 aftermath. Similarly, communicating and demonstrating the industry’s social purpose will feature heavily in due diligence of acquisition targets and in investment decisions. 
  • Product innovation: As with a clearer social purpose, product innovation will become more important. Specifically, insurers will be under pressure to re-design products to make them more applicable and adaptable to emerging risks, such as pandemics and threats related to climate change. Thus, we expect the ability to innovate to be a top criterion as insurers evaluate acquisition targets, at least as much as historical product sets.
  • Scenario analysis: Assessing business plans with any degree of confidence is going to be much more difficult given the wider economic impact of the crisis. While the uncertainty will decrease over time, acquirers will need more robust and sophisticated scenario modelling capabilities. That means developing and analyzing scenarios that incorporate downside risk in conjunction with primary “base case” valuations.
  • Workforce flexibility: The COVID-19 crisis has tested workforce flexibility in ways never previously imagined. As a result, human resources due diligence will move to the center of M&A decision-making.

The bottom line

Consolidation and wider M&A activity has been playing out across the insurance sector for many years. We do not expect the COVID-19 crisis to open the floodgates on M&A activity. Rather, we expect the crisis to reinforce and accelerate the trends that have underpinned consolidation activity in recent years. 


While M&A activity is to be expected as the sector emerges from the current crisis, we expect the lessons learned during the industry’s response will profoundly change how insurance executives assess M&A transactions in the future and the nature of the entire deal process.

About this article

By David Lambert

EY Global Insurance Strategy and Transactions Leader

Helping clients to assess the merits of investing into, or divesting of, companies in the insurance sector.