You are currently viewing Investing in insurance: The value imperative
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  • Post category:McKinsey & Company

Across private markets globally, there is persistent pressure to effectively deploy capital, generate higher-than-average returns, and exit investments profitably. Yet challenges remain daunting, including inflation and interest rate volatility in the macroenvironment and intense competition for assets resulting from investors holding significant dry powder aimed at a scarce number of targets offering sustainable sources of competitive advantage. It’s thus unsurprising that deal volumes and value for the global private equity (PE) industry fell 21 percent and 24 percent, respectively, in 2023.

When it comes to insurance, though, PE investments are rising. Following a lull since 2022, the value of private investments has jumped from approximately $20 billion in 2022 and 2023 to $27 billion so far in 2024. While consolidating distribution remains the dominant theme—especially among brokers—the areas of claims services, specialty underwriters, and insurance software have all become more of a core focus for PE investors. The catalyst? Aside from the sector’s inherent appeal, investors see clear value-creation levers, including taking what we call a “back to brilliant basics” approach to granular data; the opportunity to use AI and other technologies to reduce expenses, improve technical performance, and reduce the loss ratio or propel growth; and the ability to acquire and retain top talent to spur innovation and operational excellence.

This article provides an overview of the state of private investments in insurance and examines those critical value-creation opportunities. Fundamentally, we expect a real shift from volume to value because financial sponsors and management teams that focus on operational value creation are more likely to generate differentiated returns, which is crucial in an era of potentially higher-for-longer interest rates and a more intense focus on alpha.

Private equity in insurance today

Globally, insurance has consistently been a popular investment subsegment within financial services among sponsors globally thanks to its scale, through-cycle performance, and continued growth exceeding gross domestic product in select subsegments, as well as due to its distribution and services ecosystem that’s light on balance sheets and has a long track record of success under PE ownership.

Insurance distribution, especially in commercial lines, has proved to be the most resilient subsegment within the broad spectrum of financial services investing, even after considering the impact of increased debt costs (due to higher interest rates) in a segment that relies heavily on debt financing and M&A. It is continuing to grow: the value of insurance deals in 2024 through the end of July has already surpassed that of 2022 and 2023 and comes alongside an uptick in investments in financial technology and broader financial services (Exhibit 1).

Within financial services, insurance remains one of the largest subsegments for private equity investments globally.

Private capital is prevalent in specific subsegments of insurance, and below, we examine commercial broking, claims services, and insurance software. In addition, balance sheet plays for specialty insurance remain attractive despite some broad hesitancy among investors to take any balance sheet risk, and PE firms continue to use insurance as a source of permanent capital (for more on ongoing demand for managing general agents, see sidebar, “Continued investment in MGAs”).

Commercial broking and distribution: Continued consolidation and adjacent expansion

Broking consolidation emerged as a theme in the United States in the 2000s, and while investment slowed as a result of the recent interest rate environment, the acceleration of attractive M&A after the height of the COVID-19 pandemic, and widening bid–ask spreads for roll-ups and platforms, acquisitions in the past 12 months (compared with the preceding two years) suggest a returning market appetite. PE-backed brokers already command 39 percent of revenue of the top ten companies in France, 37 percent in the United Kingdom, 34 percent in the United States, and 28 percent in Germany. As interest rates decline, we see momentum for further broking consolidation in the United Kingdom as investors remain hungry for new opportunities in Europe (Exhibit 2).

With an eightfold increase in private equity deals in the past ten years, continental Europe has emerged as a new arena for investors.

Increased momentum does not mean business as usual for commercial line distribution M&A, however. While roll-up opportunities still exist, the multiple arbitrage opportunity has been compressed: by our estimates, there has been 1.5 to 2.0 times multiple erosion between average roll-up valuation and platform valuations. Amid recent challenges to noncompete agreements in the United States, it has also been difficult to navigate succession planning, producer recruitment, and premiums put on more-integrated platforms by private and public markets. Investors and management teams should prioritize operational value-creation levers while developing a thoughtful strategy on risk specialization to ensure the creation of “real” platforms, not subscale roll-ups with few synergies.

As broking consolidation evolves, it is expanding to vertical acquisitions to include, for example, wholesalers, corporate pension brokerage, and retail brokerage and immediate financing arrangements. This trend has emerged globally in the past two to three years, propelled by factors such as the continued complexity of risks across excess and surplus insurance requiring increased specialization to compete effectively, value chain compression allowing for the extraction of synergies, and increases in the pool of M&A targets, which empower consolidation advantages that roll-up strategies provide (such as arbitrage and synergies).

Integration is driving higher broker valuations. With increasing costs of consolidation and the push to deliver organic growth, there is pressure to create integrated platforms combining organizational, technological, and operational connectivity, which accelerate post-acquisition synergies and allow companies to implement more-effective strategic initiatives across the whole portfolio, rather than individual agencies. This has played out particularly well in platforms to enable effective succession planning and recruitment strategies, and it has proved to be a model that can uplift valuation multiples. Recent broker transactions have shown more-centralized brokers selling at a premium multiple of approximately 1.1 to 1.3. While integration is key, depending on the stage of the target, forward-looking incentives and a certain degree of autonomy are important to further grow the acquired business.

Increased management focus on cost initiatives. The insurance industry is in the sixth year of a hard market cycle, although there are clear signs of softening in a number of lines. While brokers have benefitted from recent rate uplifts, this transitioning market cycle means that large, M&A-driven brokerages will most likely need to shift highly fragmented organizations into a more centralized business that prioritizes efficiency and top-down management. Forward-thinking brokers are beginning to consider and execute strategic cost initiatives that are more material, such as rationalizing real estate footprints, finding efficiency gains through technology, examining procurement and vendor spending, and optimizing third-party compensation and commissions.

Claims services: The shift to global scale platforms

Claims services is another frontier for PE-backed insurance investment, with a focus on integrating claims capabilities and services across the claims value chain in multiple lines of business. While the playbook is similar to the formative stages of PE investing in broking, claims services is more focused from the beginning on integration and operational synergies. Although mature global platforms are still scarce, leading providers of integrated claims services have been established globally, reflecting the fragmentation of the claims value chain, the different economics and capabilities required by risk classes, and geographic differences.

The past three years have seen a significant acceleration in largely PE-backed consolidation in the claims services segment through M&A, as well as some organic capability build-out and team lifts in the more specialized end of adjusting. Within this trend, several claims services companies are focused on building scaled US and UK franchises in third-party administrators (TPAs) and specialty or complex adjusting. Despite several PE-backed consolidators in Europe, pan-European models are still nascent, in part because of challenges in navigating local market nuances and regulation. Finally, some carriers are buying claims providers and building out claims platforms (for instance, a B2B software platform for claims), suggesting a significant value-creation opportunity and demand for scaled platforms.

TPA in the United States has seen the most M&A opportunity, across both workers’ compensation and property and casualty (Exhibit 3). Consolidators are acquiring a fragmented regional landscape of players, especially those focused on local self-insured public authorities and on expanding across the claims value chain to realize scale efficiencies and gain access to higher margin businesses. Large US companies led this effort initially, but in the past three years, UK-domiciled TPAs have expanded and scaled significantly enough in the United States to reach the top 15.

While concentration in the US market for third-party administrators is increasing, this varies by line of business.

What characteristics are driving private investment in claims services? Loss adjusting, TPA, and enterprise technology players have different value-creation levers demanded by managers and investors, with a skew toward M&A and tech enablement in TPA as well as talent acquisition in loss adjusting (Exhibit 4).

Investment within claims services requires investors and managers to consider the varying importance of certain characteristics.

Insurance software: Harnessing technology’s potential

Further technological innovation in insurance is and will continue to be a must-have, especially with the advent of generative AI (gen AI). While several established insurance software players are already PE-owned, investment opportunities remain. These include a few “late starters,” such as insurance software players who have been around for ten to 15 years but are now experiencing more-accelerated growth, as well as select growth companies able to survive the current headwinds in the venture space.

The demand for better data and analytics technology solutions from insurance players (such as carriers, distributors, and TPAs) across the value chain has continued to grow. This is especially true for technical solutions proved to contribute to better loss ratio outcomes. Several companies have been able to fundraise and attract investor appetite thanks to the significant demand for solutions such as pricing software, data augmentation, claims analytics, and underwriting workbenches. Advances in gen AI increase the potential value of applying these solutions to transform the underwriting or claims domain.

PE investors can create further value across different software models by propelling go-to-market excellence across segments, achieving value-based pricing excellence, overcoming a high degree of legacy agreements, establishing a high-performing operating model, or supporting new product development.

Three key themes for value creation

During the past two decades, many PE funds have been able to generate outsize returns through financial leverage, improved governance, enhanced tax and debt structures, M&A roll-up and multiple arbitrage, and increased valuations on high-quality assets to drive value creation. Yet operational value creation is becoming increasingly critical. McKinsey analysis of more than 100 PE funds with vintages after 2020 found that GPs focusing on creating value through asset operations have IRRs that are, on average, two to three percentage points higher than their peers. Investors are focusing more on achieving targets on cost synergies, integrating workflow and processes, creating shared technology, and cultivating the business’s talent and culture backbone.

In the next era of value creation for insurance investments, we see a real shift from volume to value, including a sustainable source of competitive advantage, the ability to drive organic revenue growth even in a soft insurance cycle, and the ability to attract and retain distinctive talent. Our discussions with management and deal teams have identified three critical themes for value creation across all subsegments.

1. Going granular to find growth

As the tailwind of the current interest rate environment wanes, successful exits at higher multiples will require businesses demonstrate their ability to grow organically, outside of continuing roll-ups. To achieve high levels of growth, technology and talent levers will certainly apply, but businesses will also need to find true net-new growth, be that in specific new geographies, in lines of business, or in existing areas which are poorly served today.

Businesses should focus on getting back to brilliant basics by capturing growth through leveraging new technology and data and analytics. There is a real opportunity for companies across the insurance ecosystem—brokers, MGAs, claims services providers, and software providers—to use granular data on segments, geographies, classes, and risks to find the most profitable areas to grow, including where competitors may not be present, and determine how to enter them organically or through acquisition (for example, through targeted B2B marketing, acquisitions, or sales enablement). In addition, achieving pricing excellence is a core lever to offer further growth across priority segments, typically with very high margin contribution from pricing-driven growth.

2. Leveraging technology to drive effectiveness and differentiation

Getting value out of AI and gen AI will be critical to alpha creation for the next vintage of insurance portfolio companies. McKinsey estimates $50 billion to $70 billion of insurance industry revenue will come from the impact of gen AI productivity across business functions, and companies are well aware of the value at stake. In a McKinsey survey of more than 50 insurers, conducted in February 2024, more than half of the respondents believe that gen AI could lead to productivity gains of 10 to 20 percent, premium growth of 1.5 to 3.0 percent, and an improvement in technical results of 1.5 to 3.0 percentage points.

With a clear view on AI, businesses can refine their future value proposition to benefit from potential innovations and demonstrate risk mitigation to potential buyers. To date, many public AI use cases are evolving in underwriting with machine learning solutions for automated quotes and augmented underwriting decisions. Many insurers are taking steps toward AI maturity: 60 percent of respondents to the same February 2024 survey reported that their traditional data and AI maturity is evolving, and 20 percent said it was mature. But only a third have initial gen AI use cases in production, despite the industry remaining burdened by unstructured data, such as PDFs and documents, and manual tasks across various stages of quoting or binding policies, underwriting, and claims processing.

Gen AI is no magic bullet, but it has immense potential to shape future performance. Leading organizations are distinguishing themselves by implementing bold, end-to-end, domain-level, and enterprise-scale use cases. And companies can also greatly benefit from optimizing more-traditional technologies and improving data and analytics capabilities. For example, in lead generation and digital marketing, effective ingestion of data can allow distributors to better understand the needs of potential clients, helping producers be more informed before their initial and ongoing discussions.

3. Focusing on talent as a value creation lever

Talent has, in recent years, emerged as a critical factor in value creation for insurance companies across underwriting, claims distribution, and technology. But the industry is experiencing a talent crisis: in 2022, insurance industry vacancies increased by 74 percent year over year, and workplace attrition increased to 18 percent for some leading UK firms, though hiring rates have since improved. As experienced professionals retire, this talent shortage is expected to worsen. In important areas of the insurance value chain, such as broking and loss adjusting, losing key talent can mean losing critical client relationships, poorer financial performance, and loss of internal knowledge and expertise.

Management teams and investors should prioritize talent acquisition and retention strategies to maintain operations and drive innovation. Developing and maintaining a culture in which top talent wants to remain is critical, though this element is often overlooked when integrating multiple businesses. Recent changes to noncompete laws in the United States will allow professionals to more freely move between companies, enabling those insurers with more holistic propositions—such as packages that go beyond just renumeration—to tap into a broader talent pool and mitigate shortages.


In an era of persistently high interest rates and an increasingly challenging macroenvironment, investors and management teams have been able to focus on volume for growth. They must now pivot to emphasize operational value creation as a primary competitive differentiator. This shift requires a more nuanced approach, leveraging themes such as technological innovation, talent, and targeted growth. Investors and management teams that master these elements can position themselves for sustainable growth and competitive advantage in the evolving insurance landscape.

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