The thorny issue of business valuation

Against a shifting regulatory landscape, increased cost of doing business and dwindling customer loyalty, it may be that you are considering selling all or part of your business. It may be a decision you’ve reached recently as a result of something beyond your control turning against you, or one that you have planned for a few years and are now entering the final stretch. 

True differentiation reaps rewards

As with anything you’re selling, timing is everything, and the good news is that multiples for good businesses are still strong. The difficulty for insurance businesses is how to convince a potential buyer to value your business on the most attractive terms. Valuations are usually based on a multiple of brokerage income, and if you are a traditional insurance broking business it’s difficult to argue for it to be valued on any other basis.

At its simplest level, displaying the ability to differentiate yourself from your peers is the entry-point to enabling the value of your business being viewed differently. 

Demonstrating your identity

Let’s look at skills and resources you might have. For example, if you have moved on from merely “re-selling” insurer rates to being a business that analyses performance and flexes commission to optimise income and retention, you are already taking steps to creating your own space within the market.

Similarly if you have enriched an insurer’s product offering by incorporating your own product or service elements (not just the traditional add-ons) that suit your particular market or customer segment, again you have started to create your own identity. The key is that you can demonstrate that you have shown understanding of the market, made changes to improve your offering, and that those changes have produced a discernible (and, ideally, the expected) improvement in your results.

While enhancing value is therefore not all about technology and data, the truth is that the more you can demonstrate a track history of using data, analysis, analytics and insurtech to help drive growth in or increase the profitability of your business, and why a future that includes those elements will continue those trends further, the greater the likelihood that a potential buyer will view you more as a tech business, rather than an insurance business.

Conversely, in a world where most buyers will view engagement with tech and data as “the norm” and a pre-requisite for a robust future income stream, can you demonstrate that not possessing or deploying those skills will keep you resilient to market development over the coming years? If you can’t, why would a buyer be interested in an asset that will probably degrade faster than they perceive the “average” to be? It will either make your task of selling the business that much harder, or force you to accept a lower valuation than you were hoping for. Either way, you start on the back foot, which is never a good way to enter a negotiation.

In some cases sadly, that will be an inevitable outcome. 

Taking your first steps

However, the good news is that even if you haven’t got a track record of business differentiation, analysis or data integration, you probably possess all the basics to be able to make a start. If you have already embarked on that journey, as you’ll know, it can be difficult to decide just how far to go in balancing investment with return.

So if you are considering exiting soon, please consider carefully how you might put your best foot forward, how you entice a potential buyer to be more interested in your business than the dozen others that might, on the face of it, look exactly the same, and force them to pay more for it as a result.

Having been through the process a number of times ourselves, we can walk in your shoes and help you answer the kinds of questions you’ll be asking yourself, and take the steps relevant to your business to help drive its value higher.

What’s good for the goose isn’t necessarily good for the gander …

You’ll find us talking on here about insurtech and digitalisation, and there’s no doubt that the leaders of the pack will have been heavily investing in both over the past few years.

However, you’ll also see us constantly focusing on the underlying principles behind both as a practical, reasonable, scalable and therefore affordable way for you to help your business cope with today and thrive tomorrow. 

Make the right choices for you

While we are great believers in the positive outcomes that can flow from intelligent and appropriate use of the most up-to-date techniques, it’s very important to realise two things. Insurtech is not some monolithic enterprise that requires the kind of investment that only richly-funded outfits can muster and, secondly, what one company might view as intelligent and appropriate doesn’t mean it’s the right thing to do for your business.

I’ll give you two examples. One company, which already completes most of its business  online decided to invest in the technology and resource to analyse (not in real-time) the thousands of quotes they saw a month across a range of conversion and retention rates by various quote elements. That investment cost around $50k to set up but enabled on-going analysis to be run in-house through existing resource and software. As a result, they were able to fine-tune their commission for individual categories of business to optimise for longer lifetime value and will see their investment returned within 9 months.

The second company, while being able to offer quotes online, writes as many policies offline as it does online. Quote and policy data exists, but they weren’t routinely extracting that data to be able to scrutinise results in order to make informed change.

Using only Microsoft tools as part of their Office package, we were able to help them better understand the business they were writing and, just as importantly, the business they were writing but that actually cost more to write than they could earn over their chosen return period.

Conversely, they had an idea of what kind of business they were losing, but the analysis was able to help them pin-point the reasons why they were losing it, and they have now started to make some changes to help plug the gaps. Their next step is to look at true mid-term cancellation rates and the main drivers behind them and apply the same thought process, to focus them on retaining the right business for longer. 

Insight driving growth

While the solutions were significantly different in each case, and each example required quite different approaches, with the appropriate application of technology, those businesses were able to improve processes and results. In anybody’s book, they are both successful examples of insurtech being used to make positive change for both the client and their customers, regardless of the very different methods, and investment, being used to drive that change.

The other element that both businesses now have in common is a new confidence that flows from seeing what an intelligent and appropriate use of technology can do for their business, how simple it can be to implement, and the beneficial change it can deliver. With or without our help, they are both continuing to examine how best they evaluate ongoing performance in other areas to help themselves and their customers even more.

insurtech is a good thing, but it isn’t binary

You can’t pick up a trade publication nowadays without news of some new insurtech start-up or investment being announced somewhere up-top. For the past couple of years, the leading trade magazines have had entire sections devoted to insurtech, such is the steady flow of news in the sector.

So you could be forgiven for thinking that “the only way is insurtech”, but is that true?

At Arun Bay, we’re certain that insurtech has a significant role to play in the future of insurance and, in time, perhaps even the leading role. However, what you’ll find us talking about more often than not are the “principles behind insurtech” as we don’t believe it’s an elite club of which you’re either a member or you’re not. 

Make sure it’s right for you

If you define insurtech as being “the application of technology and innovation to drive savings and efficiency”, it’s quite clear that you can apply its principles to many aspects of most types of insurance business. It doesn’t mean that you need to go out and invest in a bank of R programmers, but it could mean that you become more aware of and responsive to the world of analytics, for example, and how looking at clusters of data to spot trends could benefit your own business.

If an insurer on your panel is talking about the analytics or data enrichment to help drive more accurate pricing they’re investing in, for example, you should be aware of what they are talking about specifically. You can then look into whether it’s worth you carrying out a similar exercise on lines across your own business, regardless of insurer. In a world of diminishing margins and reducing customer loyalty, spotting trends and identifying your champion (and your least profitable) clients or customers will help you target your efforts much more efficiently.

That analysis can be as simple as looking at in-year profit or retention by a number of single-dimensional factors or, if you can, to run various factors together to create some multivariate analysis. All of that can be done with Excel or some other simple spreadsheet program. 

Starting with the basics

I have seen businesses run even the most basic analysis and being surprised by the outcomes. In most cases it meant potentially letting-go of clients that actually lost money for the business, but in all cases it meant that the business was able to focus its limited resources more precisely on winning more profitable profiles, and on retaining those customers who bring the most profit year-on-year. It’s transformed marketing campaigns, made previously unattractive distribution channels much more appealing and given the lie to what were thought to be cash cows that were actually a drain on the business.

Adopting the principles of insurtech opens your mind to the most basic of actions, but also then hints at the “art of the possible” once you’ve seen how it can help focus attention on what really matters to a business.

It’s then up to you as to how far you take it and how much you choose to invest, and Arun Bay can be there every step of the way to help.