Customer Integration Risks in Insurance M&As

Merging customer bases in an insurance M&A can bring great rewards. And great risks! Here’s what companies need to know.

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Ace acquires Chubb for $29.5 billion. Aetna proposes to buy Humana for $37 billion. There’s no doubt that eye-popping M&As in the insurance industry are grabbing headlines. But no matter the size of the deal, getting customer integration right is key to optimizing value. It’s not as easy as it sounds . . .

The past few years has seen a feeding frenzy of large-scale mergers and acquisitions in the insurance industry. In 2014, nine transactions valued at $1 billion or more went into the books. That number shot up to 24 last year, with the proposed Anthem buyout of Cigna busting the charts at a whopping $48.4 billion. (The deal is still under review by the federal government.)

No matter the size of the deal, the potential rewards of M&As in insurance are almost too good to pass up. Shareholders stand to gain and the acquiring company benefits through improved synergies such as cost savings, operational efficiencies, and an expanded customer base. The risks are essentially the same as well, although when it comes to billion dollar deals, attention on the value gets vastly magnified. Fall short of all those billions and the shareholder price can take a hit and heads can roll.

When a deal falls short of value, the reasons can be traced to a number of areas. There may have been overstated values that led to incorrect price adjustments, for instance. Post-merger disputes and failure to find cost savings can also cause trouble. But the most important area any company should be aware of—and one that’s easy to get wrong because it’s seems so deceptively simple—is in customer integration. Companies that assume they can simply combine customer bases without due diligence risk coming up short of value.

The following four situations are the primary risks associated with customer integration in an insurance M&A.

1. Assuming One Customer Plus One Customer Equals Two Customers
As logical as this “customer math” may seem to be, it just doesn’t add up. Combining customers into a single base can in fact overexpose the merged company to greater risk. One example might be a customer who purchases general liability insurance from the acquirer, and excess general liability from the seller. In that case, either the acquirer or seller might want to stop writing one of those layers or the customer can buy his or her additional insurance from another carrier. Another is doing too much business with a single customer, also known as accumulated counterparty exposure.

There’s also the real possibility of losing customers after the merger for myriad reasons, including reduced customer service, poor perception of the merged company’s brand, or dissatisfaction with claims handling.

2. Too Many Agents Servicing Too Few Customers
This risk typically occurs when a customer has purchased property insurance from one agent or broker, and liability insurance from another. Following the merger, the customer should only have to purchase insurance from, and be serviced by, one broker or agent for both convenience and to improve synergy for the insurer.

3. Missing the Opportunity to Sell to Newly Acquired Customers
The new customer base can be a veritable goldmine for service agents—if they have a complete view of those customers and their needs. In that case, agents can “round” an account by adding auto coverage to a policy holder’s home insurance, for instance, or “up sell,” by increasing coverage limits or adding business interruption coverage.

4. Failure to Effectively Integrate Customer Data
This may be the most prevalent—and elusive—customer-related post-merger risk. Both the acquirer and seller can be at fault. Causes may be a lack of cohesive architecture, governance structure or an effective process for the integration. Whatever the cause, this missing element deprives the companies of insight and the ability to use all sources of data strategically to support decision-making.

Optimizing the Opportunities

Most M&A transactions are time sensitive. They move forward with urgency to cut off the possibility of negative impact from internal or external factors outside the control of buyer or seller. Closing quickly can also lower the overhead cost of the transaction. As a consequence, deals may be rushed through the M&A lifecycle with proper due diligence falling through the cracks.

Smart companies will enter into an M&A with eyes wide open by conducting as much customer-related planning, due diligence, and pre-integration activity as early and thoroughly as possible. Early in the planning phase, they’ll ask questions such as What is the customer management strategy of the target company? Who are the most profitable customers? What accounts are likely to follow brokers and agents if they leave? Conducting a baseline customer survey can help answer those questions, and align the integration plan to fulfill customer expectations.

Whether a proposed deal grabs headlines for its billion dollar values or is more modest, addressing the customer experience early on helps ensure opportunities are not overlooked, the customer is front and center, and money is not left on the table.

© Copyright 2016. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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