Want to Be Healthy? Grow Organically
Insurance Networking News, February 1, 2010
With investment income weakened and mergers and acquisitions (M&A) still difficult in light of the economic meltdown, many life insurers and annuity providers are ratcheting up efforts to expand organically.
Now, in a bid to boost customer retention and add new customers, they are turning to customer relationship management and customer profitability technology. They also are embracing technologies such as voice signature, which though not directly associated with organic growth, have helped them increase their number of policies and more quickly close sales.
Advertisement
While M&A remains feasible for some well-heeled and dice-rolling carriers, others are finding that organic growth offers special advantages, such as its ability to improve their shareholder value.
SHAREHOLDER VALUE AND ECONOMIC REALITIES
Several reports have questioned the conventional wisdom of turning to M&A for growth, including its uncertain ability to add to shareholder value. For instance, a study published in 2009 by two British universities - the Bristol Business School of the University of the West of England (in Bristol) and the Henley Business School of the University of Reading (in Henley on Thames) - found that based on extensive data from AXA, Generali and ING from 1995 to 2005, only organic revenue growth enhanced shareholder value.
"External growth through mergers and acquisitions does not contribute to value creation," says Gerhard Kling, principal lecturer of strategy and operations management at the Bristol Business School and co-author of the study. "In fact, the 'Merger Paradox' literature shows that stock returns of acquiring companies are negative or very close to zero after merger events. Our study used a different approach and quantified the actual extent of organic and external growth - but we came to the same conclusion."
Carriers coming to this realization tend to intensify their organic growth efforts. Yet, others refuse to see anything but M&A (i.e., external or non-organic growth) as the answer. "Based on my experience, insurance companies do not recognize the importance of organic growth and focus more on external sources of growth," says Kling. "Moreover, this behavior is driven by M&A activities of competitors, which creates 'merger waves' in the industry, as executives feel pressured to conduct M&A, as competitors did the same before."
Just a couple of the reasons for carriers' poor M&A results are that cost and revenue synergies are overstated before the transaction, and post-merger integration is much more challenging than expected, he explains.
Another study, by New York-based Deloitte Consulting LLP, echoed this shareholder principle, adding that "the life insurance industry is in the doldrums when it comes to growth," as its compound annual growth rate for premiums averaged only 1.3% from 1985 to 2005.
Even for those carriers clinging to the perception that M&A is the surest way to achieve growth, economic realities may nonetheless shut off the spigot for them. Starved of the capital for transactions, "people need to do more with less" now, says Steve Woodworth, market director, wealth management and insurance at DocuSign, a Seattle, Wash.-based e-signature provider. He indicates that since the recession, DocuSign has seen an increase of customers and, as a result, has been hiring, which dovetails with life insurers increasingly concentrating on improving efficiencies.
E-signature technology leads companies to reduce cycle time, cut costs and increase placement ratios, he says. (Still, the recession has actually enticed some carriers into M&A. See "Carpe Diem" below.)
MAKING BUSINESS EASIER
For life insurance and annuity providers, simply making transactions more streamlined can be an important motor for organic growth. "When you are trying to grow organically, it's critical to be the company that is the easiest to place business with," says John Wright, EVP of the service center of Sun Life Financial's operations in the United States. Wright is responsible for making sure the company has the high-end services necessary to help it organically grow.
John Wright
Thus, in large part, carriers such as Sun Life enhance internal growth by automating processes. More than half of the business that the firm places - and about three quarters of its premium volume - is now done so electronically. "And, almost 100% of this is placed in good order (without errors or issues) because of the edits and the process that are used to actually submit the business, including compliance efforts," notes Wright.
For more information on related topics, visit the following channels:
