Insurance investors shift their focus from volume to organic growth

Management consulting firm, McKinsey & Company, says private equity (PE) deal teams have identified three critical themes for value creation across all insurance subsegments, as PE investment in insurance rises, despite deal volumes and values contracting overall, globally.

The report, Investing in insurance: The value imperative, urges companies to go granular to find growth, leverage technology to drive effectiveness and differentiation and focus on talent as a value creation lever.

True net-new growth 

“Successful exits at higher multiples will require businesses to demonstrate their ability to grow organically, outside of continuing roll-ups. To achieve high levels of growth, technology and talent levers will certainly apply, but businesses will also need to find true net-new growth, be that in specific new geographies, in lines of business or in existing areas which are poorly served today,” McKinsey’s researchers state. “There is a real opportunity for companies across the insurance ecosystem – brokers, MGAs, claims services providers and software providers – to use granular data on segments, geographies, classes and risks to find the most profitable areas to grow.” 

Globally, they say there is intense competition for PE-backed deals, with a large number of investors prepared to invest, all being interested in a scarce number of targets. “It’s thus unsurprising that deal volumes and value for the global PE industry fell 21 per cent and 24 per cent respectively in 2023,” the report states. “When it comes to insurance though, PE investments are rising.”

Commercial lines distribution 

Distribution in commercial lines is reportedly the most resilient subsegment, specialty insurance remains attractive despite hesitancy among investors to take on balance sheet risks and claims services is discussed as another frontier for PE-backed insurance investment. Investment opportunities also exist among insurance software players, they add.

“Teams have been able to focus on volume for growth. They must now pivot to emphasize operational value creation,” the paper concludes. “This shift requires a more nuanced approach, leveraging themes such as technological innovation, talent and targeted growth.”