Businesses are exploring carve outs in response to environmental and regulatory changes or to support financial stability. Banks (New Zealand bancassurers owned by Australian banks) in particular have exited life insurance and reverted back to core business for a range of reasons. These include the Royal Commission review and impact on sales behaviour constraining banks’ effectiveness to sell; and an impending increase in capital requirements. Two examples are Westpac’s sale of Westpac Life to Fidelity Life and BNZ/NAB’s sale of BNZ Life to Partners life in a move to focus on core business.

Divestment has been cited by 30% of Asia Pacific executives as the preferred action to support financial stability in the 2021 Deloitte Global Insurance M&A outlook report. A recent example is insurance broker and risk management provider Aon, divesting its Kiwisaver scheme. The counter to these divestments is that there is often a distribution arrangement enabling banks to continue providing insurance products to their customers, giving insurers a way to reach customers.

Some organisations are exploring consolidation opportunities to extend into other areas of the industry and capture more market share or uplift capabilities. General insurer Chubb, widened their market offering with an expansion into life insurance through the purchase of Cigna. Health insurer nib, is also expanding into life insurance through the purchase of Kiwi Insurance from Kiwibank (including a distribution agreement with the bank). However, these are all pending regulatory approval.

COVID-19 has prompted a dramatic shift towards virtual customer engagement, with customers now expecting more from their insurance providers in regard to seamless end-to-end customer experience, omnichannel distribution mechanisms, and tailored products.

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 and gaps in their operating models meaning that they’re not able to respond effectively and rapidly to changing customer expectations. To deliver on these expectations, insurers require improved operational efficiency, enhanced digital capabilities, accelerated innovation, data analytics, and a future-fit operating model. Plans to resolve these shortcomings is going to be a focus for insurers going forward with 95% of respondents in the same survey saying they are already accelerating or looking to speed up digital transformation to maintain resilience.

We also expect digital transformation to have a customer experience focus across the industry. An InsurtechNZ market survey completed in 2018 found that 77% of New Zealand Insurtech players are considering how to improve the efficiency of insurance administration, 33% are looking to use a new business model with existing technology, 29% are focused on integrating multi and omni-channel, and 25% focused on integrating artificial intelligence (AI). Insurers may engage in M&A activity to access the capabilities required to support digital transformation.

The insurance industry has been a focus of regulation and compliance of late, with the Reserve Bank of New Zealand’s (RBNZ) revised Solvency Standard and climate change considerations.  

The RBNZ is currently consulting on a draft Interim Solvency Standard with the aim to ensure consistency across different industries and insurers as well as ensuring a comprehensive view of risk. The standard also signals a move towards a ladder of intervention approach where upper and lower ranges of required capital are defined with increasing intervention from the RBNZ. The standard is slated for implementation in early 2023 and it’s expected to require significant implementation effort and some potentially large increases in capital requirement.

Climate change and extreme weather events could leave some assets uninsurable. The cost of weather-related events has been trending upwards which could cause banks to assess climate-related risk differently in the future. Insurers should assess their M&A strategy from a climate angle to ensure they’re future-ready.

Organisations that are not set up to rapidly respond to regulatory, compliance and environmental changes may choose to focus efforts and investment in these areas, rather than strategy and M&A opportunities. With the operational and environmental changes caused by COVID-19, changing customer expectations and the introduction of new regulations, the time for insurers to act and respond is now.