This piece is by Andrew Houghton, Partner at Reed Smith
In insurance, the difference between a business’s value on paper and its real worth can be large, and that gap can usually be explained by people. A broker’s book of business exists because clients trust certain individuals. An MGA’s underwriting margin depends on the team’s expertise and carrier relationships. Specialist platforms rely on people who understand niche risks that most of the market overlooks. If you strip those people out, the business’s value changes fundamentally.
This is not new. But as consolidation continues and deal multiples remain high, the cost of getting the “people problem” wrong has increased. Knowing how to address it with incentives, earn-outs and a smart integration plan is now one of the most practically important skills in insurance M&A.
Why equity participation matters
Equity participation is still one of the most effective ways to retain key people. Private equity buyers are familiar with this and require management to reinvest a portion of their sale proceeds into the new structure, with genuine upside tied to the investor’s exit. This creates an alignment that salary and bonuses alone cannot match.
In insurance, senior staff directly shape client relationships, hiring and growth, so this alignment is especially important. But how you design the equity scheme matters as much as the principle. Vesting schedules, what happens when people leave (voluntarily and otherwise) and the size of the management pool all require careful planning. The package must be meaningful enough to motivate, fair to those taking on new risk, and structured to leave space for future talent. Getting this wrong at outset is costly to fix later.
Earn-outs: valuable but easily mishandled
Earn-outs are common in insurance deals, particularly for founder-led or fast-growing targets. They serve two principal purposes: bridging the valuation gap between buyer and seller and keeping the management team focused through the initial post-deal transition period.
The challenge for an earn-out often lies in the detail. For instance, gross written premium may be easy to measure but it can encourage chasing volume instead of value. Profit-based metrics can better reflect sustainable performance, but they can cause disputes when post-completion decisions like cost allocations, management charges or changes to carrier and other relationships affect results in ways that were not anticipated or expected when the earn-out was being drafted. Insurance deals may also involve commission clawback structures that need to be carefully reflected in the earn-out terms.
Disputes happen when sellers believe that the new owner’s decisions have made targets effectively impossible to reach. By that point the damage often goes beyond the financial metrics and starts to harm the working relationship the earn-out was designed to protect. Clear metric definitions, reasonable and anticipated limits on material buyer-driven changes and a workable and practical dispute resolution mechanism are essential. They make the difference between a working earn-out that achieves what it was intended to do, and one that leads to disputes.
Be careful with culture
Financial incentives can help with motivation, but they rarely on their own guarantee that people will stay. Founder-led and specialist targets often have strong cultures built around autonomy and entrepreneurship, which is often one of the principal reasons a buyer may be interested. Imposing group governance and processes too quickly and without malleability risks destabilising exactly what made the business valuable in the first place.
Investors who handle this well tend to take a staged approach. They keep the target’s operating culture in place in the early stages, introducing new frameworks gradually, and they keep employees informed along the journey with clear communication. This means that integration planning should start during the due diligence and planning phase, not after completion.
Have leadership plans
Key person risk is built into many insurance businesses. Locking in founders and senior leaders with service agreements, restrictive covenants and equity vesting is a necessary starting point. But investors also need to know what happens next – how leadership will be shared over time and whether new managers are being identified and developed. If investors do not address the key person risk during the holding period, it may become a problem at exit.
The deal within the deal
Every insurance acquisition involves two negotiations. The first is the content of the transaction documents. The second, often quieter negotiation, is whether the people who built the business or are fundamentally responsible for its success will stay and commit to its next chapter. The second negotiation can often be tougher than the first and it often has a bigger impact on long-term value.
The lesson for buyers, sellers and advisers is clear: treat people as a core issue from the start, not just an integration problem to fix after completion. In insurance, where relationships are often the main asset, few deal risks are as important.
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