Why COVID-19 Is Helping Fuel M&A Activity in Insurance Software
The sector's potential for disruption and recession-proof appeal are attracting new capital
This is part one of a two-part series about how COVID-19 has transformed the insurance industry. Part one focuses on why the insurance software space is attracting major investor interest and why conditions are ripe for consolidation.
Many global sectors have been hit hard by the pandemic and its resulting restrictions, but one that has remained resilient is the insurance industry. This isn't surprising to many industry watchers, who are fond of saying that people will always need insurance, even in a bad economy. This resilience has also extended to businesses that service the insurance industry, including software providers.
"Insurance has always been seen as a recession-proof industry," says Tony Villa, Group Leader of the Insurance and Benefits portfolio at Volaris Group, which provides back-end software for the insurance industry.
"What we saw with COVID-19 was more of the same—our insurance businesses at Volaris grew, whereas other businesses were more dramatically hit."
In fact, in the past year the insurance software space has attracted record high levels of investor interest after several recent IPOs, private equity investments, strategic acquisitions and venture-driven activity, according to a January 2021 report by Novarica. And according to CB Insights, the insuretech space recorded its highest number of deals and largest inflow of funding in 2020.
"In talking to some of these business owners... the changes brought on by the pandemic served as a warning shot over the bow. COVID-19 has gotten them to investigate a sale of their business sooner, rather than in five years."
-Tony Villa, Group Leader of the Insurance and Benefits portfolio at Volaris Group
“The recession-proof nature of the insurance industry, along with the evolution of standard fee structures toward a SaaS model of recurring revenue, are among the primary reasons why investment interest remains high in the insurance software space,” says Villa.
Further driving capital into the space is a perception that the traditionally slower-moving insurance industry is ripe for technological disruption, according to Villa.
For smaller players, keeping up with changing conditions can be a challenge – especially as COVID-19 upends how their businesses are run. As a result, Villa observes that some smaller players are taking a closer look at the benefits of being financially backed by a larger company.
"For owners and founders who weren't thinking about exiting their business pre-COVID, they now have more reason to think about it. Like everybody else, they were surprised by COVID and had to adapt through changes. And some may be wondering what other future challenges could materially impact the value of their businesses," Villa says.
“In talking to some of these business owners, especially those that are smaller and founder-driven, and whose leaders may be approaching the age of retirement, the changes brought on by the pandemic served as a warning shot over the bow. COVID-19 has gotten them to investigate a sale of their business sooner, rather than in five years.”
Another benefit of joining a larger entity is to take advantage of economies of scale.
“We talk often in the insurance and benefits group about shared services, with our businesses being able to tap into a distribution network that includes now over 500 unique insurer clients,” says Villa.
“Smaller companies that we typically talk to don’t have large sales teams or even marketing budgets. So the ability for them to leverage the sales and marketing distribution network we have, and cross-sell into an established group of clients is beneficial. It gives them the ability to play bigger than if they were doing this individually.”
At Volaris, being backed by a larger company has allowed small software businesses to focus on serving customers amid the fast pace of change spurred by COVID-19. Part two of this two-part series will go over how the businesses have fared within Volaris Group's insurance and benefits portfolio.