When Facebook bought mobile messaging application WhatsApp in 2014, the price it paid for the acquisition shocked investors. A start-up with fewer than 60 employees was bought for the astounding figure of $22bn. What lessons can be drawn from this for our own sector?
Insurers and reinsurers face an innovation problem. It is closely linked to a yawning generational talent shortage. One potential answer is that you pay a lot to buy a potential rival, once it looks like becoming a big success, but before it can become a major threat. I’m not talking about buying rival underwriting or broking outfits. With all that excess capital sloshing about, I mean buying or backing nascent technology firms.
The big players within the internet, technology and data world have consolidated into a small group of giant enterprises, led by the likes of Google (parent company Alphabet), Amazon, Apple, Facebook and Microsoft. These days nobody can challenge their data, their analytics, their reach, or their sheer heft. But these web giants have grown too big to be as nimble as in their halcyon days. Instead they buy or invest in start-up projects to keep their virtual monopoly and make fresh thinking their own.
When big reinsurers talk about “tiering” and the economies of scale, and brokers discuss developing vast analytics arms, it is all about muscling out smaller companies that can’t compete on the same terms. In the quest for “synergies”, they risk cannibalising their own pot of business when they buy their neighbour’s.
Re/insurers are well capitalised, so they can still afford to splash some cash. They also face a prolonged soft market driven by their excess capital. It makes sense to spend it on worthwhile acquisitions. Some of the prices paid for their recent merger deals were exorbitant. Who can forget the 2.4x book value paid in 2015 by Japanese insurer Mitsui Sumitomo to buy Lloyd’s re/insurer Amlin (now MS Amlin) in September 2015? At the FX rates of the time that London market deal was priced at $4.5bn.
Rather than fret about legacy systems, archaic processes and the looming risk of disruptive tech outsiders stealing the industry’s lunch, why not invest in such start-ups before they can? Some firms are already doing this. Munich Re, for example, has established a mission to Silicon Valley, there to “scout and nurture” potential partners and investments. A start-up with fresh millennial talent and success in developing platforms, apps, artificial intelligence or analysing big data patterns could be a smarter purchase than buying the mirror image insurer next door.
Nor would such deals need to be mergers. If the business acquired is separate to insurance that may be no bad thing. An investor offering capital at arm’s length is ideal for a start-up. And many of the suggestions around innovation involve ideas that are not primarily insurance apps, but could easily be expanded to boost distribution.
There is a widely reported clash of cultures across the corporate world between the outgoing baby-boomer generation and the incoming millennials, who, believe it or not, will be the sector’s CEOs within 20 years. Recruiting and then retaining such talent is essential but tough, for an industry that is old, seems old, and – however socially, economically and environmentally vital it is – still does not do the best job of selling itself to tomorrow’s would-be joiners.
The tough transition between old and new systems, and the maybe equally messy interregnum between the generations, can both be avoided if the transitional period involves partnerships working with outside tech-minded entities – which can be bought while they’re young – rather than constantly updating the straining in-house legacy systems, or by pushing the bearded hipster millennials and the pinstripe-wearing boomers together in fractious working environments.