The brokerage market experienced a period of sustained revenue growth, profitability and shareholder value, driven by favorable macroeconomic conditions. M&A activity flourished due to easy access to low-cost capital with a robust cash flow business, while organic growth was boosted by a tightening interest rate environment and inflation-related exposure increases. Shareholder value, including that of financial sponsors and employees, was also strengthened by a liquid capital market and historically high multiples, characterized by a record number of transactions. However, these tailwinds are fading as market conditions change.
The rise in interest rates, record-high valuations and limited access to capital have created significant headwinds for M&A activity Deal flow fell about 30% in the first eight months of 2024 compared to the same period in 2023. Despite this slowdown, M&A remains a critical strategy for brokers to remain competitive with their offerings to clients and maintain their bargaining power with insurance carriers. Likewise the organic growth of brokers, which has largely been driven by interest rate increases in recent years –On average, around 8 to 9% of annual sales– is beginning to ease as property-casualty rate hikes ease in some lines of business. Additionally, the average revenue of the top 100 brokers and agencies is owned by private equity has almost doubled in the last four years This suggests that more capital than ever is needed to create liquidity events for the largest aggregators.
As macroeconomic tailwinds fade, a critical question arises: How can insurance brokers evolve their strategies to usher in the next era of profitable growth?
The C-suite is exploring three longer-term levers to create and sustain profitable growth:
- Promote higher levels of standardization and integration
Brokerage firms that operate under a highly federated model or function as a holding company rather than an operating company often allow their underlying agencies to operate independently. While this approach offers flexibility and can promote entrepreneurship, it also leads to operational inconsistencies, disjointed technology systems, disparate data sources, and challenges with governance and controls. As the market evolves, brokerage firms are increasingly looking to standardize ways of working and introduce higher levels of integration into their operating models. This shift includes the introduction of a global redesign to establish consistent definitions and a rethinking of how company-wide processes should be managed to improve quality and controls.
Additionally, process standardization and agency integration must be anchored through an integrated technology ecosystem that spans business segments and functional groups to enable traceable data flow across the organization and create a single source of truth for business leadership. Closer integration and standardization provide the foundation for improved efficiency and the ability to generate better insights to drive growth:
- Greater corporate leverage and margin preservation: Standard operating procedures and tighter integration enable brokers to better consolidate non-client-facing activities. Back office functions such as accounting, IT and HR can be moved out of the agency office to increase efficiency and allow for greater focus on sales and service initiatives.
- Optimized procurement and indirect spending: Acquired agencies typically bring with them numerous technology licenses and third-party providers; A higher level of integration enables the consolidation of fragmented vendor and licensing agreements and enables economies of scale through a targeted vendor list. Additionally, efforts to promote operational standardization will open opportunities to normalize discretionary spending, for example by reducing technical side projects or solution workarounds.
- Improved data-driven decisions and accountability: With accurate, available data, operators can manage their business based on clear insights, understanding exactly what, how and why each insight is measured, including how the frontline colleagues who run much of the business impact business performance. Shifting to fact-based decision making creates focus and enables leaders to take calculated actions with measurable results, reducing the need for broad, ill-defined actions that often negatively impact margins – and creates clear accountability for what information needs to be captured in a consistent manner so that the company can leverage insights that are useful to the company and the industry.
- Activate new sources of growth:
With more restrictive M&A conditions and moderate tailwinds from renewal price increases, brokers must be strategic about where they invest for growth. It’s important to drive organic growth using data and strategies and tools such as: B. to use Generative AI to gain deeper insights for revenue-generating roles (e.g. leveraging Gen AI to identify cross-sell/up-sell opportunities across the brokerage business). Activating synergistic revenue streams by prioritizing investments in new capabilities (e.g. focusing on mergers and acquisitions that bring new products or geographic coverage), increasing scale within existing markets, or exploring vertical integration opportunities should be key focuses moving forward. We are also seeing brokerages differentiate themselves through industry niches and specializations and tie these into MGAs or affinity partnerships to become preferred distribution partners for specific industries. Finally, as the E&S market continues to grow, brokerage firms have a significant opportunity to expand their scope of operations into the wholesale business, enabling multiple revenue streams, particularly in sophisticated exposure areas and coverage lines.
- Invest in essential skills and new talent:
As brokerages drive greater levels of integration, the focus is shifting to agencies with strong operators rather than agencies run exclusively by savvy (sales) entrepreneurs. This change requires a different leadership profile – one that can manage operators and lead the transformations necessary to respond to growing market pressures while continually creating value for shareholders (e.g. standardizing integration, improving technology, building and attracting new talent). Such capabilities are relatively new to brokerage leadership, and it can be challenging to place executives to lead these transformations in a federated model comprised of corporate and regional structures and the underlying agencies. The ability to influence and drive change across all levels is a special skill.
Four short-term quick wins to get you started
While the longer-term response to the pressures facing the brokerage industry will require focus and coordination from the C-suite, we recommend brokerage leaders four initial steps they can take to get started:
- Identify priority areas for standardization and centralization: For more fragmented brokers, we begin by standardizing first-level data entry processes (e.g. AMS standard operating procedures), begin moving to common technologies (e.g. an agency management system), and work to centralize common low-risk activities to demonstrate success and build buy-in for future centralization (e.g. vendor payables, data processing, policy certifications, claims processing, etc.).
- Reassess the M&A agenda: Updating corporate appetite for M&A to be more selective; Each transaction should support a long-term growth agenda and complement the core business. Explore divestment of non-core businesses to generate new sources of capital and allow the company to focus on what allows the company to be an operating company rather than a holding company.
- Evaluate business reports and data gaps: While management can produce financial statements and operational reports, the fragmentation of AMS and accounting systems often requires extensive data cleansing to meet these basic reporting requirements. Understand the technology/systems landscape (e.g. how AMS instances connect to the accounting/financial source of truth) and operating models across the organization to map data flow and identify opportunities for greater data hygiene, integrity and availability. We see brokers initially prioritizing standard methods of producing financial and operational management reports to lay the foundation for deeper insights.
- Identify priority talent gaps: Decisions to use the levers discussed above are highly strategic and likely necessary for brokerage firms to withstand changes in the market. However, implementing these decisions requires talent not typically found in today’s brokerage firms. Identify key talent gaps (e.g. transformational leadership, business operators, data skills, industry specialization) to pave the way for the future and develop a plan to attract these talents.
We have helped and are actively supporting agents to navigate this evolving landscape. Please contact Heather Sullivan, Gina Papas, Robert Held or Bob Besio if you would like to discuss further.
