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

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

GG: All indications are M&A activities have decreased significantly since the end of [last] year. Obviously, that has a lot to do with what has happened economically in the last six to nine months, but it's also part of what you generally see in M&A in our marketplace, which is you tend to get cycles and flurries. We had a flurry in late 2007 through the first half of 2008, which I think was driven by the general buoyancy of our market in terms of carrier companies buying replacement solutions for core administration systems. I believe that attracted some larger players into the market in M&A mode. I think there was a natural cycle anyway, but that cycle was abruptly ended by the crash in the economy last year.

TD: Is this a worrisome time for smaller vendors that are looking to sell to someone? Can they attract buyers and survive?

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

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

GG: I'm not sure whether above the curve is the right term. It's doing better. I alluded in an earlier answer to the fact we've had our own bull market in the software replacement industry--certainly for P&C--for probably our third year. The carrier companies have been buying policy, claims, billing, and underwriting software, rating engines, and the like. That wave did not falter in the last year. I guess if I'm hearing anything from the vendors, companies still are buying and being somewhat more aggressive in negotiating price, but the deals still are happening. There are no figures out that say what our deal rate is this year vs. last year, and those numbers are only anecdotal in our industry anyway, but all indications are the market remains strong. So, I'm not sure we're recovering faster or are ahead of the curve; I think we just never faltered very much.

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

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

So, these vendors have written their system assuming they are going to have strategic relationships with companies that already have established and viable components they can integrate into. That plays into this whole componentized architecture notion, and it's a good idea in general. It makes perfect sense there are vendors today that, because of architectural choices, have to have relationships with other vendors in order to be able to present a viable solution to the marketplace. The trend that has concerned me over the years is you have a relatively small vendor that makes a partnership announcement in order to look bigger, and the question there is what does that partnership actually consist of, what does it mean, and is the partnership something a carrier can take advantage of? Is it simply a press release, or does it mean two vendors actually have done something together such that they have created an integrated solution, which is relatively low risk for the carrier looking to purchase the solution.

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

GG: That's been an interesting and topical question for a couple of years now. We've had two or three fairly high-profile events in our market over the last two or three years that are illustrative of what you get in these circumstances. If you were a client company of InsBridge two or three years ago, you became a client of Skywire, and now you are actually a client of Oracle Corp. Oracle is a very different entity than Skywire, which in turn is a relatively different entity from InsBridge. So, through a sequence of events such as that, you can find yourself a client of a company with which you have a very different kind of working relationship and partnership than you would have with a smaller niche market player. Generally speaking, the vendors in our market are small, and they are vertically focused. We tend to have relatively parochial relationships between the carriers and the vendors in our market. Oracle and SAP have marched boldly into our space in the last couple of years, and they are huge multibillion-dollar organizations with a certain corporate style that is very different than our market generally is used to dealing with. So, there are risks associated with that. In doing your due diligence as a carrier, one of the questions you try to delve into is the stability of the vendor, whether the vendor has plans to be acquired or to acquire another vendor, whether it will change its mission statement or its critical focus. So, a carrier asks all these questions, but that's no future-proofing of the fact a vendor may be acquired in a year or two after that.

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

GG: They can send me an e-mail I would be very happy to respond to at george.grieve@castlebayconsulting.com.

Special Reports /

Tech Decisions Summer 2009 Online Analyst Series: Part III

Related Stories

Recommended For You