Regulatory changes and a reduced appetite for insurtechs are driving down insurance carrier mergers and acquisitions (M&A), a newly released report has found.

M&A were down by 17 percent worldwide during the first half of 2023.

So far this year, there were 171 completed deals worldwide, down from 207 in the second half of 2022 and 242 at the same point last year, according to Clyde & Co’s Insurance Growth Report mid-year update.

The drop-off in activity was most pronounced in North and South America, which had 79 deals, down from 104 in H2 2002, as M&A in the region fell to the lowest level since 2014, the report stated.

The U.S. continued to be the most active country worldwide, Clyde & Co. reported, with 60 completed transactions in H1 2023, down from 83 in the previous six months.

Europe reported 47 deals in the first half of 2023, the lowest level reported in more than a decade.

The UK led the European countries in terms of deals with 11 – ahead of France and Germany – but dropped to fourth place globally behind Canada and Japan, the report noted.

M&As fell from 33 to 29 in Asia Pacific, with a spread of transactions across the region ( Japan had 14 deals and Australia, China, Hong Kong and South Korea reported three each).

The Middle East and Africa was the only region to see an increase in M&A in H1 2023, the report found, with nine completed deals compared to eight in the previous six months.

“The lull in insurer M&A will be short-lived,” said Eva-Maria Barbosa, partner at Clyde & Co in Munich. “Despite ongoing geopolitical and economic uncertainty, insurance businesses are adopting a ‘Keep Calm and Carry On’ approach. Carriers are less dependent on bank financing for strategic transactions as they are restricted to leveraging a smaller proportion of the transaction anyway. With insurers typically balance sheet-heavy at present, the break in carrier M&A activity is likely to be over. Meanwhile, private equity capital is returning to the market for broker deals.”

Diminishing appetite in some regions for insurtech businesses has been one factor in the overall drop in M&A activity, Clyde & Co. reported.

Finding capital for insurtech businesses has been difficult in Europe due to continuing inflation and rising interest rates.

In contrast, the U.S. hasn’t seen many true insurtechs come to market.

The report noted interest in insurtech elsewhere, including from private equity remains strong, including in Latin America and Asia, and particularly in countries with high levels of internet penetration such as Indonesia, Vietnam, the Philippines and Thailand – for a range of personal lines business.

“Private equity firms are looking at investing in some of the Asia tech players around the region, at all stages of development, with prospective capital providers fairly evenly split between international PE firms and regional asset managers, ” said Joyce Chan, partner at Clyde & Co in Hong Kong. “Meanwhile, as the use of AI in insurance becomes better established, investment is likely to return to insurtech in other regions – as the sector best-placed to leverage the emerging technology.”

Though regulatory enforcement is slowing insurance activity due to an increased cost of doing business, new legislation in other territories is helping to drive business opportunities, the report noted.

“Hong Kong’s new risk-based capital regime for insurers will come into force in 2024, which could lead to a spate of transactions as those who struggle to comply look to exit certain lines of business,” the report stated.

International best practices, driven by regulatory actions, will force carriers in the Middle East to adopt and open up M&A opportunities as market consolidation continues.

“We are seeing regulators become more proactive in the Middle East, but it isn’t dampening M&A activity currently,” said Peter Hodgins, Clyde & Co partner in Dubai. “There is a continuing drive by regulators to get carriers to clean up their act and to squeeze out less financially able players. That is creating opportunity through encouraging further consolidation in the market.”

Cyber continues to rise as both a growth opportunity for carriers and a risk management concern, Clyde & Co. stated.

“Many acquirors have revealed that due diligence around cyber risks of target companies has risen from a top ten to a top five concern when considering potential acquisitions,” the report stated. “Correctly worded warranties in relation to IT systems and cyber issues are a key concern, as the broad wordings in existing agreements are less likely to pick up potential post-transaction issues.”

“A real risk of cyber incidents is the nature of interlinked systems – when there is a compromise and the related legal issue of who is the data controller,” said Rosehana Amin, Clyde & Co partner in London. “When a purchaser acquires the target company’s data, will the contract make it clear who retains responsibility? Is there an understanding of legacy data that it might be acquiring? If data is compromised, the relevant entity may be subject to scrutiny and liable for potential regulatory fines.”

Though M&A deal volume isn’t expected to return to the highs of 2022, the report forecasts M&A activity will rebound in the second half of the year.

“Given that growth in M&A activity typically lags behind improvements in underlying market conditions by anywhere from eight to 12 months, the dip in completed transactions over the last six months is unsurprising. We anticipate that the volume of transactions will start to rise again towards the end of 2023 as insurance businesses acclimate to the new operating environment, with the broker segment leading the way,” said Barbosa.

Activity in the U.S. will pick up because of increased interest in strategic acquisitions, she added, noting that international capital re-entering the Middle East through investments in regional brokers and third-party administrators will also drive an increase.