Insurance CEOs are looking to partnerships to drive the next wave of shareholder value. Yet few seem confident in their partnership capabilities. What will it take to drive real and sustainable value from partnerships in the insurance sector?
Insurers know that disruption is upon them. And they recognize they need to transform if they hope to remain relevant to customers. But with so much disruption in the marketplace – technological, financial, political and social – few insurers can confidently predict where the market is going.
Not surprisingly, partnerships are on the rise as insurers’ hedge their bets. Many view partnerships as a comparatively low-risk and low-cost way to tap into new ideas, models and innovations. Most recognize that partnerships and alliances will be key to their growth going forward.
In fact, in a recent survey conducted by KPMG International, almost two-thirds of insurance CEOs said collaborative growth would offer the best opportunities to drive shareholder value over the next 3 years. Forty-six percent said they would create new partnerships or JVs over the next 3 years.1
Activity has been feverish. Some, notably Aviva, have created ‘digital garage’ concepts where tech startups, insurance professionals and academics come together to solve key insurance challenges. Others (such as AIG, Hamilton Insurance and Two Sigma) are forming collaborative partnerships aimed at combining their capabilities to create new platforms and ideas. And almost everyone is developing traditional partnerships and JVs to fill in gaps in their capabilities and their footprint.
The problem is that few insurance CEOs seem confident in their organization’s partnership capabilities. Indeed, in our survey of CEOs, just 34 percent ranked their organizations as being ‘highly capable’ at building partnerships with startups. And only 43 percent said they were highly capable of collaborating with customers, partners and suppliers.
In part, they are right. Traditional deal making and partnership capabilities are simply not fit for purpose in today’s environment. Targets cannot be assessed purely on their financial value, but rather on the long-term value or transformative value that they might deliver to the organization. Due diligence and deal assessment skills are certainly useful, but insurance M&A teams will need a far broader set of capabilities if they hope to drive real and sustainable value from partnerships, particularly with tech firms and startups.
But the reality is that capabilities are only part of the partnership problem facing insurers today. It starts at the top end, with deal identification and alignment to strategic priorities. As we note in a report published this month by KPMG International, insurers recognize that alignment between their M&A, Corporate Strategy and Innovation teams is essential to driving value. Yet 37 percent still admit that their approach to deal making is primarily reactive.2 Greater alignment will be needed if insurers hope to achieve transformative value from the partnerships they strike.
Insurers will also need to rethink their approach to business case development in order to find the right partnerships for development. They will need to resist the temptation to apply their traditional models – largely developed to support the assessment of distribution agreements – to today’s non-traditional partnerships. They will need to recognize that data is currency and that IP is value, rather than just focusing on financials, market reach and channels.
Once smart and strategically-aligned partnerships have been identified, insurers will need to think carefully about how they integrate the ‘outputs’ of the partnership into their existing business and operating models. A clear roadmap must be developed at the start, creating milestones and targets, as well as alignment to defined business outcomes.
Interestingly, this is where most insurers tend to struggle. Far too many partnerships are formed without a clear understanding of how value will be created, not only for the insurer, but also for the other parties in the partnership. And without a clear roadmap for creating value, any partnership is doomed to under-deliver.
Insurance CEOs also have some work to do. Driving value from partnerships requires the right tone at the top and CEOs (and their executive teams) will need to take some ownership over the partnership strategy. They will need to encourage cooperation and alignment between their M&A teams and their Strategy and Innovation objectives. And they will need to think more broadly about what constitutes value for their organization.
Insurance CEOs are right to think that partnerships will drive the next wave of value creation in the insurance sector. But only if they know how to extract it. Insurance CEOs may want to rethink their approach to partnerships.
© 2018 KPMG, a Mauritius partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.