In today’s insurance environment, victory belongs to the bold. Margins are under pressure, and competition is heating up; insurers can no longer afford to sit on businesses that are under-performing or sub-scale.
By taking a portfolio approach to their businesses, insurers can start to assess the value and performance of their assets to make bold decisions on whether to grow or go (build or leave the business).
Time for bold decisions
Facing continued low interest rates, growing rate pressures in the property and casualty (P&C) sector and high levels of competition in both the P&C and life sectors, insurers will see margins under pressure for the near future.
Not surprisingly, most have already undertaken massive cost-reduction initiatives. Now, with little room left to cut, some are starting to take a more critical and strategic view of their business as a whole.
Our experience suggests that insurers need to take bold action and make difficult decisions now if they hope to create shareholder value and grow their business. The reality is that too many insurers are carrying businesses that are sub-scale, underperforming or simply distracting for management.
See Also: What is Your 2016 Playbook for Growth?
To help organizations assess their businesses and local operations, we have developed a diagnostic tool that segments businesses in the following way:
Taking a portfolio view
We firmly believe that there are significant opportunities to help insurers enhance shareholder value by taking a portfolio view of their assets. And, in doing so, insurance organizations should be able to make clear decisions about whether to go (i.e., leave those markets and businesses that do not meet the strategic objectives of the organization) or grow (i.e., committing to targeted investment to drive transformational change and improvement initiatives
that will allow the business to compete effectively).
Indeed, by looking at non-core businesses as a portfolio of assets, insurance executives should be able to properly assess each businesses’ strategic fit, performance and synergies, which, in turn, will enable them to identify opportunities to improve the business through portfolio realignment.
Taking a portfolio view will also provide insurance executives with the insight needed to prepare a fix, close or sell strategy that drives a clear approach for non-core assets and then move through to a robust execution plan with appropriate governance.
GO: A bespoke approach to divestment
In those cases where the assessment process leads to the decision to go, insurance executives will need to develop a smart divestment strategy for the business. Interestingly, our experience suggests that the divestment process has evolved considerably over the past decade.
Whereas in the past, the normal approach to selling a business involved rigid auction processes based on standard checklists and documents such as information memoranda and vendor due diligence reports, most now recognize that this approach may not maximize value.
Instead, insurers are now taking a more bespoke and focused approach to divestment that is largely influenced by four key factors:
— economic conditions
— sellers taking control
— wider buyer populations
— business model changes
GROW: More than just scale
Insurers need to have sufficient optionality and diversification
to respond to a rapidly changing business environment. And while not all divisions and local operations need to be market-leading, they do need to demonstrate how they can make a contribution to the overall strategic ambitions of the organization.
For some, the answer will come in the form of inorganic growth within their sub-scale businesses. For others, targeted investments to support product growth initiatives or new distribution arrangements offer a lower-risk solution.
However, while many deals have been driven recently by organizations with a (fully understandable) strong focus on costs and efficiency, we often find that scale, in itself, is not a good enough reason to support a deal. Indeed, we believe that acquisitions must also bring complementary capabilities (such as new expertise in specific product lines, increased geographical reach or new distribution models) to create a sustainable platform for future growth.
GROW: Responding to a changing environment
New technologies, changing customer demands, new ways of doing business and the threat of innovators disrupting the traditional business model are all changing the way that insurers view their portfolio of assets and businesses.
See Also: The Formula for Getting Growth Results
Clearly, understanding and capturing the benefits of innovation is a critical imperative, and there are major opportunities available for companies willing to invest in new technologies. Recognizing this, many insurers are now starting to develop new models and ways of working with the financial technology (FinTech) community.
Key takeaway: Be bold
Regardless of whether the decision is to grow or go, insurers need to start facing up to the difficult decisions that must be made about their underperforming assets.
Interestingly, our experience suggests that — in this rapidly evolving space — outright acquisition may not always be the right answer. As our recent report, The Power of Alliances, demonstrates, many insurers are now exploring the value that could be generated by investing in partnerships, alliances and innovation hubs to broaden their exposure to innovations and technology solutions.
Simply put, insurers can no longer afford to sit on businesses that are not delivering value; they must make bold decisions and then execute on them to win in this environment.
Reprinted from (Regulatory Challenges Facing the Insurance Industry in 2016,) Copyright: 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the facts of a particular situation.
For additional news and information, please access KPMG's global website.
Taking a portfolio view
We firmly believe that there are significant opportunities to help insurers enhance shareholder value by taking a portfolio view of their assets. And, in doing so, insurance organizations should be able to make clear decisions about whether to go (i.e., leave those markets and businesses that do not meet the strategic objectives of the organization) or grow (i.e., committing to targeted investment to drive transformational change and improvement initiatives
that will allow the business to compete effectively).
Indeed, by looking at non-core businesses as a portfolio of assets, insurance executives should be able to properly assess each businesses’ strategic fit, performance and synergies, which, in turn, will enable them to identify opportunities to improve the business through portfolio realignment.
Taking a portfolio view will also provide insurance executives with the insight needed to prepare a fix, close or sell strategy that drives a clear approach for non-core assets and then move through to a robust execution plan with appropriate governance.
GO: A bespoke approach to divestment
In those cases where the assessment process leads to the decision to go, insurance executives will need to develop a smart divestment strategy for the business. Interestingly, our experience suggests that the divestment process has evolved considerably over the past decade.
Whereas in the past, the normal approach to selling a business involved rigid auction processes based on standard checklists and documents such as information memoranda and vendor due diligence reports, most now recognize that this approach may not maximize value.
Instead, insurers are now taking a more bespoke and focused approach to divestment that is largely influenced by four key factors:
— economic conditions
— sellers taking control
— wider buyer populations
— business model changes
GROW: More than just scale
Insurers need to have sufficient optionality and diversification
to respond to a rapidly changing business environment. And while not all divisions and local operations need to be market-leading, they do need to demonstrate how they can make a contribution to the overall strategic ambitions of the organization.
For some, the answer will come in the form of inorganic growth within their sub-scale businesses. For others, targeted investments to support product growth initiatives or new distribution arrangements offer a lower-risk solution.
However, while many deals have been driven recently by organizations with a (fully understandable) strong focus on costs and efficiency, we often find that scale, in itself, is not a good enough reason to support a deal. Indeed, we believe that acquisitions must also bring complementary capabilities (such as new expertise in specific product lines, increased geographical reach or new distribution models) to create a sustainable platform for future growth.
GROW: Responding to a changing environment
New technologies, changing customer demands, new ways of doing business and the threat of innovators disrupting the traditional business model are all changing the way that insurers view their portfolio of assets and businesses.
See Also: The Formula for Getting Growth Results
Clearly, understanding and capturing the benefits of innovation is a critical imperative, and there are major opportunities available for companies willing to invest in new technologies. Recognizing this, many insurers are now starting to develop new models and ways of working with the financial technology (FinTech) community.
Key takeaway: Be bold
Regardless of whether the decision is to grow or go, insurers need to start facing up to the difficult decisions that must be made about their underperforming assets.
Interestingly, our experience suggests that — in this rapidly evolving space — outright acquisition may not always be the right answer. As our recent report, The Power of Alliances, demonstrates, many insurers are now exploring the value that could be generated by investing in partnerships, alliances and innovation hubs to broaden their exposure to innovations and technology solutions.
Simply put, insurers can no longer afford to sit on businesses that are not delivering value; they must make bold decisions and then execute on them to win in this environment.
Reprinted from (Regulatory Challenges Facing the Insurance Industry in 2016,) Copyright: 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the facts of a particular situation.
For additional news and information, please access KPMG's global website.
