Insurers are merging, acquiring and divesting business units at an accelerated rate today. According to Deloitte, whether an insurer is looking to increase their customer base, consolidate operations, move into new markets, offload non-core business units, or add strategic insuretech capabilities to their portfolio, more than half of all insurance industry executives expect to complete an M&A transaction in the next two years. Yet a game-changing insurance merger could turn into a costly IT compliance, data and security nightmare, without proper upfront IT planning and preparation, and a flexible IT foundation.
The essential role of IT TSAs
IT transition services agreements (IT TSAs) play a critical part in any successful insurance merger, acquisition or divestiture. These agreements outline the continued provisioning of services or use of assets or resources by a non-owning entity after a transaction has closed. They are intended to ensure continuity of services, (whether it’s IT, finance and accounting, or HR) minimizing operational disruptions until the seller’s and buyer’s IT environments can be fully comingled or disentangled, even if that occurs following deal close (and for insurers, it usually does). An IT TSA can also accelerate the negotiation process and close by allowing the deal to move forward without waiting for the buyer to complete transition or separation of all critical IT support services.
Potential Pitfalls for Both Sides
Without a rigorously detailed IT TSA, sellers may offer too many undefined IT services and underestimate the true cost of those services, while still remaining legally bound to provide them, resulting in non-reimbursable costs during the transition period. Buyers, on the other hand, may agree to poorly scoped IT transition services and insufficient ongoing IT support, which can lead to disagreements and a slower overall separation process. Buyers might find sellers, now acting as service providers, prioritizing their own organization’s mission-critical IT service requests, resulting in slower response and resolution of their own IT incidents.
Another often overlooked and costly factor? Some software licensing agreements cannot be used during a TSA period without significant renegotiation (which must be done prior to transition or buyer will incur hefty fines). Insurers must also identify critical separation issues, like the use of use of shared applications, comingled data, and outdated hardware and software.
Due Diligence Challenges: Don’t Forget the Data
During M&A, IT teams are responsible for bringing two enterprises’ data together into a new, secure, and reliable infrastructure. Merging insurers need to share data from policy holders, prospects, employees, agents, suppliers, vendors, and more. Regulated data not only needs to be handled according to various policy requirements but must be integrated in the most secure way possible to enable proper governance and privacy compliance down the line. IT TSA due diligence must:
- Identify all data each organization collects and holds
- Classify all data
- Develop a comprehensive integration plan
- Ensure all data is merged without duplication, disruption, or security breach
Challenges inevitably arise: more than half of all integration activities depend on IT, yet IT is one of the most complex areas to integrate, and CIO involvement is often delayed until after initial due diligence. That’s why it’s imperative understand the vulnerabilities and weaknesses of both parties IT estates prior to signing off on due diligence. For example, in the US, an acquiring insurer may be held liable for lapses or breaches that result from the acquired company’s failure to comply with local, state or federal data security and privacy laws. The acquiring insurer may also be held liable for any data and security breaches by the acquired insurer, that were not discovered before the deal close.
Talk To An Ensono Insurance Expert
In 2020, there were 620 insurance deals in the US, with an aggregate deal value of $21.6 bn. Ensono works with over 20 insurers worldwide, and has extensive experience helping highly regulated and audited insurers assess, modernize and optimize their hybrid IT to accelerate digital transformation and thrive. Ensono’s insurance experts can help guide both insurance industry buyers and sellers to prepare for a merger, acquisition, divestiture or spinoff, and prepare and assess your hybrid IT estate prior to any transaction and recommend modernization and optimization strategies to help insurers lower operating costs immediately and reduce long-term capital expense.