Companies cannot rely on organic growth alone, which is why programmatic M&A has been an element of every resilient company’s growth. This is according to McKinsey’s latest report on insurance growth strategy in Asia.
The report, titled ‘Insurance strategy in Asia: Using programmatic M&A during the pandemic’, noted that insurance M&A activity in Asia decreased by 30% in 2020, when compared to 2019. “Macroeconomic effects will likely cascade throughout the insurance industry and squeeze margins, thereby revealing which companies are strong enough to invest in strategic acquisitions and which may benefit from the safety of joining forces with healthier competitors or interested new entrants,” said the report.
Programmatic M&A is a continuous programme where a company sources M&A opportunities throughout the year. “You’re constantly looking, scouting and engaging with targets throughout the year,” said McKinsey partner and report author Alex Kimura, speaking to Asia Insurance Review. “The message to insurers is that programmatic M&A is very important and an element of their strategy, as important as one of their initiatives in their organic strategy. It should not be side-line item, but a core item in any one strategy.”
Digitisation has also been a significant motivation for M&A, a direct way for insurers to acquire InsurTech capabilities and technology talent. “There are continuous upgrades and evolutions of any specific technology, so it’s important for insurance companies to keep up,” he said. “This is where the next generation of insurance companies will need to be positioned. They need to be more tech enabled, more digitally enabled. And more than that, they need to partner with different companies in the ecosystem where their partners can be more digital.”
As a good fit can be hard to find, insurers must maintain a full M&A pipeline so they can react decisively when they encounter a valuable opportunity. The cornerstone of any M&A strategy is a set of clearly articulated inorganic goals that include M&A as well as alliances, partnerships, and joint ventures. These goals will inform the composition of insurers’ M&A pipelines, which should include both high-priority and second-order targets.
M&A in future
“M&A activity decreased in 2020, as companies tend to be more conservative in terms of laying out cash during times like these,” said Mr Kimura. “But as we come out of COVID and sort of into the new normal, we can expect a more increased activity throughout the Asia. Obviously, different countries will have a different contour of how much activity there will be.”
Maintaining a close watch can help resilient and cash-rich insurers tap into emerging intraregional opportunities. Liquidity and capital pressures may lead some non-Asian or multinational insurers to exit some markets in Asia in the short or medium term, which could lead to block sales of in-force books of business, the report said.
As cross-border cooperation becomes more common across Southeast Asia, this might also be a good opportunity for companies who are looking to expand regionally. In Asia, several players are part of local family-owned conglomerates that have expanded outside their core businesses into insurance. These smaller players may decide to retreat from insurance and refocus on their core businesses, which may lead to an uptick in M&A activity in the coming months.
However, companies will also need to be aware of the environment that they are transacting in. For instance, COVID-19 made it difficult, sometimes impossible, for companies to conduct due diligence checks on offices. Further, with many companies now shifting to a completely remote office, such checks might not be necessary anymore, although they would shift towards a different process.
“I think some companies are more comfortable with remote due diligence than others, but it is becoming the new normal. It will be new for a lot of people, and they will have to get used to this new way of conducting M&A,” he said. A