As insurance companies are optimizing portfolios to take advantage of market conditions and evolving opportunities that are going to continue to play out in 2021, many are assessing their current product and service portfolio to determine what’s performing well and whether their investments are delivering value as expected.

In the process, some are rethinking their existing business models as they realize that certain assets may be more valuable separately than together and that deploying freed-up capital could benefit them and their stakeholders in better ways. This awareness is driving companies to rebalance their portfolio by carving out noncore businesses and/or geographies. Among preferred actions to support financial stability in the coming months, divesting nonperforming or noncore operations was cited by 36% of North American executives, 22% of European executives, and 30% of Asia Pacific executives.

Not only has the COVID-19 pandemic severely disrupted insurance companies’ day-to-day operations—prompting a dramatic shift to remote work and virtual customer engagement—but it has also uncovered substantial gaps in insurers’ operating models and enabling digital capabilities that they should work to close in 2021. Deloitte’s global survey of insurance executives found 79% of respondents believe that the pandemic exposed shortcomings in their company’s digital capabilities and transformation plans. In response, 95% of those surveyed are already accelerating or looking to speed up digital transformation to maintain resilience.

Historically, the insurance industry has underspent in technology investments, creating a digital divide between insurers and current and prospective customers. To deliver a frictionless, end-to-end customer experience, improve operational efficiency, and accelerate innovation, companies across the insurance industry need to think and act digitally. The urgency to act—partly in response to COVID-19–spawned disruption—is accelerating organizations’ efforts to deliver within the coming year what might originally have been three-to-five-year transformation plans. Among survey respondents, investment priorities include cybersecurity (66%), cloud computing (59%), data privacy (53%), and data analytics (49%).

Accounting developments

There are no looming accounting developments in 2021 that would serve as a deal-forcing function. Still, life and annuity insurers should continue preparing to meet updated Financial Accounting Standards Board (FASB) reporting rules for long-duration contracts, which are expected to fundamentally change how insurers measure, recognize, and disclose insurance liabilities and deferred acquisition costs. To comply with the new standards, insurers likely need to become much more agile in how they report, manage, and analyze data. While compliance efforts can be complex, costly, and time-consuming, they may be leveraged as a catalyst to modernize and expand business value across the insurer’s information value chain.

Tax policy developments

With potential changes in the US tax landscape on the horizon, insurance companies should strategically think through the tax implications of 2021 M&A transactions, both in the United States and other jurisdictions. The unprecedented amount of excess capital in the system from global COVID-19 economic stimulus efforts could produce short-term M&A tailwinds that turn into headwinds as policies tighten and tax rates go up. Planning is likely to require close monitoring of legislative and economic developments on multiple fronts, as well as investment in tax modeling and structuring, to quantify and adapt to whatever changes materialize.

Regulatory developments

Insurance companies should keep on top of new and changing regulations in the following areas:

• Privacy compliance. The California Consumer Privacy Act (CCPA), the first major piece of data privacy legislation in the United States, became effective January 1, 2020. Insurers should strategize their compliance approach amid the continued rollout of other state-level legislation. Specifically, they should know where data about individual consumers is stored, how complete and accurate it is, and how it is used and protected.
• Best-interest industry sales standards. June 30, 2020, was the compliance date for the US Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI), which requires broker-dealers to satisfy four important obligations: care, disclosure, conflicts of interest, and compliance. Companies should assess their current state to identify potential gaps and enhancements needed for compliance, especially in anticipation of an M&A transaction.
• Market conduct. The mitigation of conduct risk continues to be a key focus area for insurance companies. Heightened regulatory scrutiny over the way insurers and their employees and agents interact with customers and markets likely will continue in 2021 and could extend into the various allowances and accommodations that states made for consumers under COVID-19 protections. Market conduct exams may uncover that consumers were not treated as they should have been under established rules.
• Fraud. Regulatory and insurance company watchdogs should remain alert to increased instances of hard and soft insurance fraud in 2021, as they often accompany an economic downturn. Insurance fraud steals at least $80 billion every year from American consumers. Common frauds include inflating claims, misrepresenting facts on an insurance application, submitting claims for injuries or damage that never occurred, and staging accidents.
• Climate risk. The escalating frequency of extreme weather events around the globe is sharpening regulatory focus on insurance risk and climate change. The Deloitte Insurance Regulator State of Climate Risks Survey found that many regulators either aren’t aware of how prepared carriers are to deal with this threat or aren’t fully confident that carriers are indeed prepared. Insurers have an opportunity to more effectively communicate around climate risk management strategies and performance measurement through more standardized disclosure.
• Diversity, equity, and inclusion. At the National Association of Insurance Commissioners’ (NAIC) 2020 summer meeting (held virtually), members agreed to form a commissioner-level special committee on race and insurance, which has several charges to “effect real, meaningful, and lasting change.” Fifty member states of the 56 member jurisdictions have signed up to be part of this committee to take meaningful action.

M&A executives who responded to Deloitte’s 2020 Future of M&A Trends Survey are sending clear and strong signals that dealmaking is expected to be an important lever to navigate the COVID-19 crisis, enhance organizational resilience, and pursue new and disruptive growth strategies. We agree that M&A should have a strong influence on shaping the next-normal insurance environment. Indeed, disruption can birth opportunity—historically, M&A deals during uncertain times have created more value.

We expect to see a mix of offensive and defensive M&A strategies materialize in 2021 as insurance companies position themselves to protect existing markets, evaluate business mix and portfolio options, and capture defensible market leadership. In addition to traditional mergers and acquisitions, companies should consider deploying a wide range of inorganic growth strategies, such as partnerships with their peers, coinvestments with PE firms, investment in disruptive technologies, cross-sector alliances with specialists, and partnerships with governments.

Defensive M&A

The impact of the pandemic has forced many in the industry to evaluate their respective business models. As a result, some in the insurance industry may turn to M&A—whether by choice or necessity—to drive down costs, increase economies of scale, guard their client base, and safeguard their future. We expect companies to deploy defensible M&A strategies to strengthen their capabilities and market posture in order to maintain competitive positioning coming out of the pandemic.

Offensive M&A

The COVID-19 crisis has highlighted the attraction of new digital channels, agile operating models, and supply chain links. Many insurance companies may need to actively pursue transformative acquisitions to rapidly adapt to the irrevocable changes to their business models. Priorities include transforming operations based on structural changes from the crisis. In addition, companies should more actively engage with the innovation ecosystem, as well as consider alliances with both traditional and nontraditional players.