While the software market in insurance remains strong despitethe economy, the number of mergers and acquisitions has slowed.George Grieve, founder and CEO of CastleBay Consulting, explainsthe impact of this on vendors and insurers.

TD: Merger-and-acquisition activity among insurance softwarevendors was at an all-time high for the first nine months of 2009.Where does it stand today, nine months after our economic world gotturned upside down?

GG: All indications are M&A activities have decreasedsignificantly since the end of [last] year. Obviously, that has alot to do with what has happened economically in the last six tonine months, but it's also part of what you generally see inM&A in our marketplace, which is you tend to get cycles andflurries. We had a flurry in late 2007 through the first half of2008, which I think was driven by the general buoyancy of ourmarket in terms of carrier companies buying replacement solutionsfor core administration systems. I believe that attracted somelarger players into the market in M&A mode. I think there was anatural cycle anyway, but that cycle was abruptly ended by thecrash in the economy last year.

TD: Is this a worrisome time for smaller vendors that arelooking to sell to someone? Can they attract buyers andsurvive?

GG: I'm not sure what the overall picture is with reference tothat. There are a couple of points that are relevant, however. Oneis the overall vendor market--certainly in property/casualty andnot so much in life/health--remains fairly positive. In general,the vendors in the P&C space are doing remarkably well giventhe overall economy, and that's because the P&C industry isdoing relatively well faced with the rest of the economy. And theindustry has avoided system upgrades for so long now most CEOs havedecided--regardless of the economic conditions--they have to moveforward with their modernization plans. We have vendors in ourmarketplace that range from a dozen people and $5 million inrevenue up to $50 or $100 million. We've just come out ofconference season--ACORD LOMA and the IASA conferences--andcertainly based on the conversations I had with a lot of vendors,most vendors are feeling fairly confident right now. I didn't talkto any vendors that felt like they were being shopped for marriageor looking for a suitor. Most people seemed to feel fairlyconfident with where they were.

TD: So, is the insurance technology industry above the curve inthe economic recovery?

GG: I'm not sure whether above the curve is the right term. It'sdoing better. I alluded in an earlier answer to the fact we've hadour own bull market in the software replacement industry--certainlyfor P&C--for probably our third year. The carrier companieshave been buying policy, claims, billing, and underwritingsoftware, rating engines, and the like. That wave did not falter inthe last year. I guess if I'm hearing anything from the vendors,companies still are buying and being somewhat more aggressive innegotiating price, but the deals still are happening. There are nofigures out that say what our deal rate is this year vs. last year,and those numbers are only anecdotal in our industry anyway, butall indications are the market remains strong. So, I'm not surewe're recovering faster or are ahead of the curve; I think we justnever faltered very much.

TD: Vendor alliances always have been a way for insurancetechnology vendors to market or improve their offerings tocustomers. How are things working in that regard, and is it trulybeneficial for both sides?

GG: A couple of things always need to be said in answer to thisquestion. Number one, from the point of view of the carrier, it'sbuyer beware in a circumstance such as this. One of the trendswe've seen over recent years is vendor companies that have veryrationally thought through what they want to offer the marketplace.We have seen this clearly in the policy administration systemspace. The more recent arrivals in that market don't have asolution that includes a rating engine, and they do not have asolution that includes a document generation component. What theyhave done is to focus on the very hard issues that have to do withproduct definitions over time and the policy life cycle.

So, these vendors have written their system assuming they aregoing to have strategic relationships with companies that alreadyhave established and viable components they can integrate into.That plays into this whole componentized architecture notion, andit's a good idea in general. It makes perfect sense there arevendors today that, because of architectural choices, have to haverelationships with other vendors in order to be able to present aviable solution to the marketplace. The trend that has concerned meover the years is you have a relatively small vendor that makes apartnership announcement in order to look bigger, and the questionthere is what does that partnership actually consist of, what doesit mean, and is the partnership something a carrier can takeadvantage of? Is it simply a press release, or does it mean twovendors actually have done something together such that they havecreated an integrated solution, which is relatively low risk forthe carrier looking to purchase the solution.

TD: When carriers are looking for products, how might theM&A market reflect in their purchasing decisions, and what docarriers need to look out for in these cases so the company theyare choosing as a partner stays their partner and doesn't becomeanother company?

GG: That's been an interesting and topical question for a coupleof years now. We've had two or three fairly high-profile events inour market over the last two or three years that are illustrativeof what you get in these circumstances. If you were a clientcompany of InsBridge two or three years ago, you became a client ofSkywire, and now you are actually a client of Oracle Corp. Oracleis a very different entity than Skywire, which in turn is arelatively different entity from InsBridge. So, through a sequenceof events such as that, you can find yourself a client of a companywith which you have a very different kind of working relationshipand partnership than you would have with a smaller niche marketplayer. Generally speaking, the vendors in our market are small,and they are vertically focused. We tend to have relativelyparochial relationships between the carriers and the vendors in ourmarket. Oracle and SAP have marched boldly into our space in thelast couple of years, and they are huge multibillion-dollarorganizations with a certain corporate style that is very differentthan our market generally is used to dealing with. So, there arerisks associated with that. In doing your due diligence as acarrier, one of the questions you try to delve into is thestability of the vendor, whether the vendor has plans to beacquired or to acquire another vendor, whether it will change itsmission statement or its critical focus. So, a carrier asks allthese questions, but that's no future-proofing of the fact a vendormay be acquired in a year or two after that.

TD: If readers want to talk a little bit more with you on thissubject, how do they get in touch with you?

GG: They can send me an e-mail I would be very happy to respond toat [email protected].