How the M&A environment will affect carriers’ business models

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Canadian P&C insurance industry carriers and service providers will need to transform their business models to help control claims and operating costs in an M&A environment featuring competing demands for capital, speakers said Thursday at KPMG’s 2023 Insurance Conference in Toronto.  

“Insurers in our mind have to adopt an 80/20 lens,” said Georges Pigeon, a deal advisory partner with KPMG in Canada. “They need to think through what is core versus non-core in their business. 

“Doing that is going to help them rationalize their portfolios, do vertical integrations and, ultimately, the key to profitability and sustained profitability is going to be simplification, being ruthless about it, focusing on what’s core and just offloading the non-core.” 

Pigeon was speaking during the breakout session Navigating through the current M&A dynamics with Andew Mathias, senior vice president of corporate finance of KPMG in Canada. The two discussed how geopolitical and economic uncertainties, shifting demographics, and adapting to consumer behaviours have forced insurers to rethink their M&A and growth strategies. 

Insurers are proactively looking at ways to control claims costs in the “higher-for-longer” interest rate environment. And with competing demands for capital, insurers are trying to figure out where they can best deploy their money because capital is more expensive.  

“It’s putting a lot of pressure…on carriers because the hurdle rates for their rates of return have gone up. So, they have to think carefully where they will invest their money,” Pigeon said. 

At the same time, carriers are trying to control operating costs by investing in technologies and simplifying their processes. Insurers modernizing their operating models will see the most success, conference attendees heard. “The future is going to belong to those who can leverage automation and emerging technologies to make their businesses more sustainable, more efficient,” Pigeon said. 

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During the COVID-19 pandemic, a lot of money went into technology. That tech investment has taken a pause, but KPMG expects the investment to return, along with strategic partnerships being developed on that front. Analytics are also coming into play, which could lead to bespoke products or some innovative insurance models such as on-demand and usage-based products. 

And then there’s artificial intelligence — which remains in its infancy — and quantum computing, which can help carriers leverage data to benefit underwriting and claims management.  

“Ultimately, the catalyst to those changes…is M&A partnerships and alliances,” Pigeon said. “It’s going to help accelerate these strategic transformations. It really accelerates the decision of, ‘Do I build it? Or ‘Do I buy it?’ And sometimes buying it accelerates that process.” 

Despite reports of M&A activity slowing down early this past year, KPMG expects there will be an upsurge in transactions. 

Private capital entering the insurance sector is a recurring theme, which can challenge incumbents to find ways to cut costs and improve capital efficiency.  

“We’re not seeing [private capital] going away,” Pigeon said. “They’re going to be ever-present.” 


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