Considering Using Dry Powder
on an Insurance Deal? 8 Things
to Know Now

If you are a fund, family office or other institutional investor considering an investment in the insurance industry post-COVID-19, you should weigh variables specific to this sector that could make such investments more attractive.

Despite likely losses in some lines of insurance, overall the pandemic’s legal impact on the industry suggests some encouraging dynamics, including the following:

• Most lines of insurance business appear not to be significantly affected by the pandemic. There are lines, such as health and workers’ compensation, where pandemic exposure could be significant. Early indicators suggest, however, that few other lines are likely to sustain major losses, absent some kind of legislative or judicial intervention.
  
  
• Legal developments such as government-supported backstops might stimulate demand for insurance products and services. The COVID-19 pandemic may motivate individuals and businesses to reassess their needs and strengthen coverage. Legislation being considered by at least five states could mandate pandemic coverage both retroactively and prospectively. Proposals in the U.S. and elsewhere, similar to the Terrorism Risk Insurance Act’s post-9/11 terrorism reinsurance program, would create government-supported facilities that would absorb some or all business-interruption losses caused by future pandemics. These proposals could create new market demands and a new role for insurers in the post-pandemic economy.
  
  
• Infrastructure investment would generate significant insurance demand. The Trump administration and Congress may pivot to infrastructure as the next stimulus effort in response to the coronavirus pandemic. Should this go forward, the demand for insurance in multiple property-casualty lines could be substantial as resulting construction, industrial, lending and commercial activities take off.
  
  
• The pandemic comes at a time of tremendous innovation in products and distribution channels. Like Fintech in other branches of financial services, Insurtech is providing more customer choice and variety, with regulatory experimentation accompanying these changes. For example, insurance products sold by mobile device might involve electronic, rather than physical, delivery of notices or other carrier communications, whereas decades-old state laws might require mailed, paper notices. Or new “point-of-service” products may be predicated on underwriting factors not historically recognized under state laws. State regulators have expressed interest in adjusting these requirements, within parameters, to accommodate these new businesses, and are introducing reforms on a trial basis in some instances (regulatory “sandboxes”).
  
  
• Insurance investments continue to represent noncorrelated risk compared to other asset classes. Whether insurance investments pay off depends at least as much on the occurrence of insurable events as on macroeconomic risks. The lack of correlation to traditional business cycles, equity markets and other conventional measures of economic health can make insurance investments a good hedge.

Additional factors on the legal front, which predate the pandemic and may be reinforced by it, include the following:

• The range of deal technologies is broad. Insurance transactions can embrace a number of forms, from traditional stock acquisitions to buying blocks of business to securitized reinsurance and more, allowing an investor to tailor deal structure to business objectives more surgically.
  
  
• Regulators are tough, but they like new capacity. When buying a carrier, you may have to navigate challenging regulatory requirements, but most state insurance regulators are keen to have new capacity entering their markets in the form of sophisticated, responsible, professional investors.
  
  
• Prior approval for acquisition is generally required only in the case of a carrier, not producers. Acquiring producers (agents, brokers, managing general agents, program managers, etc.) can be an attractive way to establish a footprint in the sector, with less regulatory oversight generally than acquiring a carrier would require.