Digital-first upstarts that have built their operations around modern technology stacks from day one are placing competitive pressure on the traditional insurance industry. Lemonade and Root Insurance have demonstrated that seamless, instant experiences are possible for insurance, from quote to claim. In the UK market, Marshmallow has similarly disrupted traditional motor insurance by leveraging AI and modern data analytics. They appeal to underserved communities with personalised pricing and streamlined digital experiences. These modern insurers operate with dramatically lower cost bases and faster product development cycles than traditional carriers.

This disruption is an urgent imperative for modernisation among traditional insurers. Legacy players are caught between rising customer expectations for slick digital experiences driven by other financial verticals and the limitations of decades-old infrastructure. The result is a widening capability gap that threatens market share, profitability and ultimately survival. Most industry discussions focus on modernisation as a defensive response to competition. However, an equally compelling but less discussed strategic dimension is preparation for M&A opportunities.

Modernising Insurance is a Must

Mergers and acquisitions in insurance are notoriously complex. Integrating product portfolios, claims histories and policyholder data across multiple lines and regulatory environments can be fraught with risk. The technical reality of merging legacy platforms often determines whether acquisitions deliver their promised value. Or become costly technical quagmires that stall innovation for years.

The potential challenges become even more pronounced when considering major legacy players. The rumoured clash of technical complexities between Aviva and Direct Line Group, both legacy giants with significant technical debt, exemplifies this. Merging outdated systems can create integration nightmares. These can compound existing inefficiencies. Such combinations risk creating even more complex, fragmented technology estates that become increasingly difficult to modernise.

Davies Group recently secured £275 million for M&A and generative AI investment. This demonstrated that consolidation and digital transformation should be pursued in parallel. Consolidation is accelerating across the insurance industry. Carriers are discovering that reliance on outdated technology stacks doesn’t just hamper competitiveness; it makes them toxic acquisition targets or ill-equipped acquirers. According to ACORD’s 2025 Insurance Digital Maturity Study, only 25% of top insurers have truly digitalised their value chain. Furthermore, over half still exploring how to apply digitalisation to their business models.

Legacy Systems Limit M&A 

Most insurers’ IT environments are dominated by legacy systems that consume the majority of their resources. PwC estimates that 70% of an insurer’s annual IT budget is spent on maintaining these legacy systems. This leaves little room for innovation or strategic initiatives. While legacy infrastructure may appear inexpensive on paper, acquirers often discover upgrading or replacing core business systems post-merger requires substantial investment. This can erode the ultimate value of the deal or even derail transactions.

A 2025 industry survey found 46.4% of insurers cite inflexibility to adapt to market changes as the most significant limitation of their current core systems. This is closely followed by integration challenges with new technologies (45.5%) and high maintenance costs (44.5%). These challenges are not just technical; they directly impact M&A outcomes. Data consolidation becomes exponentially complex when bridging inflexible legacy systems with modern platforms. Even when dealing with standard data structures, product definitions and customer identifiers.

Modern Technology Accelerates Deal Flow

Insurers are increasingly viewing technology through an M&A lens. The critical question has shifted from “Is this system good enough to run the business?” to “Would a buyer be able to integrate this system with minimal friction?”. Modernisation is now a core rationale for many, with forward-thinking insurers proactively upgrading systems to reduce complexity and improve interoperability.

This approach works. The latest tranche of modernisation, including the robust integration of AI capabilities, can reduce annual expenses by as much as $480 billion in property and casualty insurance and $300 billion in life insurance globally. Internally, modernisation improves operations and accelerates innovation. Externally, it signals digital maturity and business agility, qualities that enhance an insurer’s appeal and can increase its valuation in competitive acquisition scenarios.

Private equity firms are particularly attuned to the importance of digital maturity. In 2025, 82% of PE-backed insurance consolidators reported focusing on enhanced technology and insurtech capabilities post-acquisition, aiming to avoid the time and cost of transformation while rapidly building market share. For example, Munich Re’s $2.6 billion acquisition of Next Insurance was driven by a strategy to acquire digital capabilities, not just market share.

Meanwhile, strategic acquirers, such as Gallagher’s $1.2 billion purchase of Woodruff Sawyer, reflect a focus on operational gains and scale. Both PE and traditional insurers agree 52% of buyers expect significantly more emphasis on technology due diligence over the next two years. This underscores the centrality of digital readiness in dealmaking.

Cross-Business Value Creation

Modernising legacy systems to become acquisition-ready also opens the doors to a broader pool of potential acquirers. An insurer with digital infrastructure can attract interest not only from traditional players but also from reinsurers and private capital seeking to build scalable platforms in niche segments like embedded insurance or SME cover. A well-executed modernisation programme empowers insurers to court acquisition interest or pursue joint ventures, partnerships, or IPOs from a position of strength.

Modernisation has progressed from a back-office IT concern to a strategic enabler of business growth and M&A success. The lower the barriers to an insurer being absorbed into a larger platform, the more attractive it becomes as a target. As the insurance sector’s digital transformation accelerates, those who modernise today will be in pole position for tomorrow’s deals.