A More Perfect Union
Challenges and opportunities with insurance and legal services mergers and acquisitions
By Dion Cominos
The 21st century has seen a marked increase in mergers, acquisitions, and consolidations in many industries, and insurance and legal-services businesses have not been immune to the trend.
There are many reasons for these consolidations, including increasing market share, enlarging geographic footprints, achieving greater scale/efficiencies, accomplishing cost savings, brand expansion, diversification of portfolios/service offerings, taking advantage of purchasing/pricing powers, achieving a higher return on capital, and keeping up with industry competitors. But, for all the benefits achieved by mergers, acquisitions, and other forms of combinations, there are unique challenges regarding how best to achieve desired strategic goals, and how to accomplish successful integrations, unified strategies, and cohesive and coherent execution plans.
Drivers of Consolidation
While many factors are driving consolidation in the insurance and legal services industries, competition—specifically the need to keep pace with marketplace peers—is chief among them. As insurers face challenges such as barriers to premium growth in developed markets, competition from new market entrants, higher claims experience, and weak investment yields, the creation of scale through growth has become a greater strategic priority.
In North America, the advent of Dodd-Frank and a host of new regulations provide additional motivations as larger organizations with greater scale are more able to possess the resources necessary to navigate the challenges that legislation and regulations present. In the EU, difficult market conditions and rising compliance costs make economies of scale a priority. And, in Asia, profitability pressures make insurance M&As more appealing.
But scale is not the only factor motivating insurance industry M&A activity. Insurers are also looking to improve their returns on capital and their abilities to utilize enhanced data and management tools so they can better understand business operations, better control costs and spending, and maximize profits. Consolidations allow insurers to adopt more holistic views of aggregated underwriting segments across entire organizations and spread risks more broadly among diverse global markets.
With respect to the legal services industry, law firms are challenged to offer “one stop shopping” to an increasingly international clientele. They are also growing to keep pace with competitors that offer greater geographic and practice group breadth. At the same time, technological advances have made it possible for law firms to expand and integrate more rapidly and operate in a decentralized and far-reaching fashion. Consequently, the pace of consolidation in the legal world has dramatically increased over the past decade.
Changes in Practices
Once the M&A wave begins in a given industry, organizations inevitably react to competitors’ actions in order to keep pace. However, it’s important to note that M&A is not a strategy by itself. There must be some greater business purpose that a proposed combination is expected to achieve. Achieving a successful consolidation requires a fundamental re-examination of the business model itself, with specific emphasis on strategic objectives and the steps necessary to accomplish those objectives.
In the insurance industry, a company undergoing a consolidation will need to establish which market sectors it will focus on, which it will exit, how remaining business lines complement each other, and whether redundancies exist. The company will also need to consider how it will deliver a differentiated, streamlined, and integrated product to the marketplace that not only reflects the advantages of the consolidation, but also justifies the expense and disruption.
Law firms will need to demonstrate to their clients that bigger is indeed better, and that they have not simply grown for growth’s sake while passing the costs off to their clients.
Meanwhile, big data is having a major effect on insurance/legal consolidations. Greater size and scale allow companies to aggregate, analyze, and act upon a far greater set of analytical information, which will, at least in theory, lead to greater predictability of costs/outcomes and superior evaluative tools to measure performance, savings, and profitability. Increasingly, companies in the insurance and legal industries will apply big data and related analytical tools to areas such as risk avoidance, product personalization, cross-selling, and up-selling. In the claims and litigation management arenas, big data has been helpful in fraud detection, claims management, loss prediction, and vendor oversight/control.
The integration of systems—claims management, billing, data aggregation, etc.—is a challenge that law firms and carriers face in the post-consolidation world. In nearly all cases, there will be a legacy system that survives the consolidation as the primary modus operandi, and this system will not always be compatible with the acquired company’s pre-existing, established system. A successful integration requires the development and execution of a well-planned strategy that runs the gamut from underwriting, to claims, to IT.
Law firms will need to adapt to newly imposed reporting requirements, billing systems, approaches to claims handling, and policy interpretations. Newly merged law firms must carefully watch for conflicts (both actual and positional in nature) that will not always be apparent early on. As firms continue to take on new engagements, the vetting process must be constantly updated.
Combined entities will also need to implement comprehensive and integrated approaches to cybersecurity. Data protections are only as strong as the weakest link in a given company. A newly combined entity will need to ensure that there is a backup system to protect not only the legacy company’s information, but also the data of the acquired company (which may not have had a comprehensive data management/storage/backup protocol or system in place).
Finally, law firms, like insurance companies, are at their essence a collective of individuals. The success or failure of an attempted consolidation ultimately depends on how well a cultural integration is achieved and implemented across the new organization. This begins with defining and articulating a core company mission statement that it is clearly distributed and understood. The company must take steps to ensure its strategic incentives and objectives align with this core statement. This can be challenging since mergers/acquisitions often involve layoffs, business unit closures, and executive-level employee departures.
Making Insurance/Legal Collaborations Successful
Ultimately, the relative success or failure of an industry consolidation will be measured by whether the sum of the parts is greater in combination than individually; whether overall net cost effectiveness has been achieved; and whether the consolidated entity is able to deliver something of greater value to the marketplace than it could in an unconsolidated state.
In order to be successful in their continued interactions with the insurance industry, law firms working with consolidated insurance carriers will need to understand what the carriers’ core objectives were when it undertook the consolidation, then adapt their servicing approaches to conform to those objectives. For example, if a carrier is focused on evaluating the performance metrics of the combined entity, then its counsel would be well advised to develop sophisticated data gathering and analytical tools to provide meaningful feedback and information. Law firms must also understand that, as part of consolidation efforts, carriers may be looking to work with fewer law firms in order to optimize priorities such as pricing; terms and conditions of service; centralized points of contact; consistency among business lines; avoidance of conflicts; and the ability to demonstrate to insureds that panel firms have the size/scale, sophistication/competence, and wherewithal to handle engagements at least as capably as, and more cost effectively than, non-panel firms.
The intelligent planning and execution of a sound M&A strategy can lead to significant advantages in the marketplace, deliver a broader variety of products and services at more favorable pricing, and produce a superior return on capital. We expect to see continued M&A activity in the insurance and legal worlds, presenting both significant challenges and opportunities for the industries at large.