Some jaws dropped when Prudential Insurance paid $2.35 billion to buy the Seattle-based insurance-technology startup Assurance IQ. However, this expansion by Prudential is expected to save the company costs up to $50 million in 2020 and $100 million by 2022. Of course, these are predictions without any guarantees.

Assurance is a top-notch insurance leads provider. It operates a B2C platform and uses data science and machine learning to make applying for insurance much faster and readily available from 20+ insurance providers. The main reason Prudential made the purchase was because the company wanted exposure to an online-shopping demographic, especially with its life insurance and annuities products. With the use of Assurance’s digital platform Prudential will gain consumers who want to buy insurance online. Not only will Prudential stand to gain exposure to online shoppers, but it will profit from commissions Assurance makes from its other insurance providers. 

As expensive as this venture sounds, it can be argued that Prudential made a wise investment that will grow the insurer’s business exponentially over the next few years. Insurtech companies are growing menacingly big through global funding, so it was a smart move on Prudential’s part to merge with an online shopping platform, to compete with the new kids on the block, the digitally savvy insurance companies like Lemonade, Hippo and Clover Health. This acquisition will bring Prudential’s game to the present and future, by upping its digital game. 

In a way, the vertical integration of Assurance by Prudential mimics the vertical integration of independent agencies by carriers as a way to increase underwriting volume. Take a look at the acquisition of AIS Insurance agency by Mercury Insurance a few years back: AIS still sells policies for other top carriers, but Mercury now profits from these activities too. The reason this merger is not considered a horizontal integration is because AIS only serves a distribution function but is not a direct competitor and it does not write its own policies (neither does Assurance). 

Insurance Industry Disruption and the Future

As it stands now, insurtech companies are disrupting the insurance industry effectively. Some that started off selling insurance leads are even beginning to partner with carriers to sell insurance. It stands to reason that to survive, many insurance carriers will soon have no choice but to merge with these new players, whether it be horizontally, vertically or both. 

In the insurance business, the old adage, “If you can’t beat ‘em, join em,” is proving to be more true than ever before. Let’s look at the two ways insurance companies can expand through mergers: vertical integration and horizontal integration. 

Vertical Integration

Vertical integration usually takes place when an insurer buys a company that comes either before or after it in the supply chain process. Prudential now owns and controls Assurance’s lead generation mechanism and distribution of services — which is what a vertical integration would do and then some. It also stands to expand into new lines of insurance, home and auto, that Prudential would not otherwise sell but in a limited way (commissions)l. Also, Assurance will continue to work with other insurers, without overwhelming Prudentials’ underwriting capacity.

If you decided to take a vertical-integration strategy to grow your insurance business, you’d be owning or controlling your suppliers, distributors and retail locations to control the value of products or services. Vertical integration can improve efficiency in specific areas and reduce costs. However, the initial cost of investing in these areas of expansion is usually very high and can deter an insurance carrier from making big capital investments. 

One disadvantage to growth using a vertical integration strategy is that the company or agency may become too big to manage properly. You also risk losing expertise, depending on what area you decide to take on as your own. Are you able, for instance, to get skilled marketing people at a lower cost than buying an agency which sells policies and has experts in SEO, social media and branding already on staff? Would merging with a leads company drive a larger profit than buying an insurance agency? There are no right or wrong answers here, and the answer is very specific to the companies involved.

Horizontal Integration

Horizontal integration is the acquisition of a business operating at the same level of the value chain in a similar or different industry. Unlike vertical integration, where firms expand by seizing control of different processes along the lines of production, horizontal integration is a competitive strategy based on merging businesses that perform the same or similar functions. For instance, when Farmers bought Bristol West to expand its demographic in Florida, that was a horizontal integration. Both companies underwrite policies and are therefore closer in value.

Horizontal integration helps businesses expand their market or enter new markets and reduces competition, sometimes with the result of raised rates for consumers. Companies who expand this way are heavily scrutinized according to antitrust laws because they can easily turn into oligopolies and monopolies.

The whole purpose of Prudential’s integration with Assurance was to reduce competition from other emerging insurtech companies and competition from established competitors alike. Without Prudential, Assurance would continue to grow as a competitor in the industry. Instead of waiting for Assurance and other insurtech companies like it to overtake the need for a relationship with an established insurer like Prudential, the veteran insurer made the sale worthwhile to Assurances, to the tune of $2.3 billion!
In an era where small insurtech companies, like SmartFinancial, are growing exponentially every quarter, we’re sure to see many more mergers like the one with Prudential and Assurance.