Case Study: Buy & Build Models
The challenge of insurance consolidation in tech buy & build strategies
The tech industry is characterized by rapid technological change. However, European markets are often highly fragmented and smaller and medium-sized companies with a focus on niche markets or specialized technologies often do not have the financial means to keep up in a global market and achieve further growth. Buy & build strategies allow larger companies to take advantage of this fragmentation to consolidate market share and increase their market power. By integrating several smaller companies, they can realize synergies, reduce costs and expand their competitive advantages.
As a result, the management of buy & build models is faced with the complex task of efficiently integrating different software companies. An often overlooked but critical aspect of this is the management of the various insurance policies of the acquired companies.
Initial situation
A typical scenario: A private equity-backed software platform company acquires six smaller software companies within 24 months. Each of these companies brings its own portfolio of insurance policies:
- Cyber insurance with different sums insured, insurance conditions and deductibles
- D&O insurance from various providers and not available from every company
- IT liability insurance with different, sometimes outdated wordings
- Various property & casualty insurance policies of varying quality
The policies have different terms, meaning that immediate consolidation is not possible.
The problem
This fragmentation leads to several critical challenges:
- Increased administrative effort due to multiple policies
- Inconsistent sums and scopes of cover
- Overlapping insurance benefits with the risk of double insurance and therefore uncertainty as to which insurer is liable in the event of a claim
- Inefficient cost structures
- Increased risk of gaps in cover
- Lack of knowledge of own risk insurance and thus a potential case for personal manager liability of the managing directors if a claim turns out to be uninsured.
📍Special hint for D&O insurance
of private equity-backed buy & build models:
Managers are liable for their mistakes with their private assets. A good D&O insurance policy provides a remedy. For buy & build models with private equity investors, we regularly recommend higher sums insured than for companies of the same size without this background. This is partly due to the complexity of the structures in buy & build models until uniform processes have been created and partly because the private equity investor is also accountable to its investors. If a managing director of a portfolio company breaches his duties, the investor will have to hold the managing director liable.
Case study: Technology GmbH
Technology GmbH, a leading provider of enterprise software solutions, was faced with precisely this challenge. Following the acquisition of five companies, the finance department:
- 4 separate cyber insurance policies
- 3 different D&O insurances
- Various IT liability insurance policies and public liability insurance policies
- Various smaller property insurance policies with an outdated list of risk locations and no co-insurance for mobile working, as the policies have not been updated for a long time
The solution: strategic insurance consolidation
Thanks to our many years of experience as a specialized insurance broker, we were able to develop and implement a comprehensive consolidation strategy for the insurance companies together with the management:
1. analysis and inventory
Detailed review of all existing policies for:
- Scope and amount of cover
- Costs and conditions
- Terms and notice periods
Detailed audit of the company:
- Organizational chart - Which companies must be insured?
- Activities - What are the company's activities with regard to the planned consolidation and are they already covered by existing policies?
- Markets - In which countries is the company active and where must insurance cover be in place?
- Growth - What growth is targeted in the coming years and how can this be reflected in the cost structure of the insurance companies?
📍Why planned growth is important for a good insurance program:
- Choice of insurer:
Not every insurer is suitable for every company size. By taking the company's growth planning into account, a suitable insurer can be selected, thus reducing the future expense of changing insurers. - Premium scale:
If you do not actively approach the insurer, the premium rates that were agreed at the start of the contract apply. However, as premium rates are actually degressive and decrease with increasing turnover, long-term cost savings can be achieved by actively agreeing a premium scale as soon as the insurance program is implemented. - Premium invoicing:
Many insurers invoice retrospectively at the end of an insurance period based on actual turnover, while some insurers only invoice the future annual premium. This means that the right choice of billing model can save considerable costs for rapidly growing companies!
2. development of a group insurance strategy
Implementation of a centralized insurance concept with:
- Uniform sums insured
- Standardized conditions
- Group-wide risk management
- Standardized terms
By consolidating the insurance policies at holding company level, a centralized, uniform risk management system can be implemented throughout the company. We examined whether new insurance policies were actually needed or whether a conversion of the existing policies could be a good result. In this case, we were able to upgrade one of the existing D&O insurance policies to holding company level and terminate the other policies.
The results
By implementing the new insurance strategy, we were able to:
- Relieve management and implement a suitable workflow for all insurance-related topics.
- Achieve cost savings of 43% by consolidating and optimizing insurance contracts.
- Eliminate existing double insurance.
- Reduce the number of insurance contracts to be managed from 23 to 8.
- Coordinate standardized processes for new acquisitions.
Best practices for CFOs and CEOs
Based on our experience, we recommend the following procedure:
- Early planning: Insurance consolidation should already be considered in the due diligence - We are happy to support you with an insurance due diligence audit
- Use expert knowledge: Involve specialized brokers with tech expertise
- Standardization: development of a blueprint for future acquisitions
- Digitalization: Implementation of a central insurance management system
Conclusion
Strategic insurance consolidation is a critical success factor in tech buy & build strategies. The potential cost savings of up to 50% are just one aspect - equally important are the improved risk coverage and increased operational efficiency.
For managers, this means that the early involvement of insurance experts with tech expertise can make a significant contribution to the success of the buy & build strategy.
Key Takeaway:
Professional insurance consolidation in tech buy & build scenarios not only leads to significant cost savings, but also to better risk management and more efficient processes.
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