The brokerage market has experienced a period of sustained growth in revenue, profitability and shareholder value, driven by favorable macroeconomic conditions. M&A activity has boomed due to strong cash flow operations and easy access to cheap capital, while organic growth has been fueled by a deteriorating interest rate environment and increased exposure to inflation-driven risks. Shareholder value, including that of financial sponsors and employees, was also underpinned by liquid capital markets and historically high multiples, marked by a record number of transactions. However, as market conditions change, these favorable factors are weakening.
Soaring interest rates, record valuations and tighter access to capital have created significant headwinds for M&A activity, Transaction flow will drop by approximately 30% in the first eight months of 2024 Compared with the same period in 2023. Despite the economic slowdown, mergers and acquisitions remain an important strategy for brokers to stay competitive in the products they offer clients and maintain their negotiating power with insurance companies. Likewise, over the past few years, the broker’s organic growth has been primarily driven by rising interest rates –Annual income averages about 8% to 9%——As interest rates for property insurance in some business lines increase moderately, compression begins. In addition, the average revenue of the top 100 brokerages and institutions held by private equity has Nearly doubled in the past four years This suggests that creating liquidity events for the largest aggregators requires more capital than ever before.
As macroeconomic tailwinds begin to fade, a key question arises: How can insurance brokers strategize to usher in the next era of profitable growth?
C-suite executives are exploring three long-term levers to create and sustain profitable growth:
- Drive greater standardization and integration
Brokerage firms that operate on a highly syndicated model or operate more as a holding company than an operating company often allow their underlying institutions to operate independently. While this approach provides flexibility and can foster entrepreneurship, it can also lead to operational inconsistencies, disconnected technology systems, disparate data sources, and governance and control challenges. As the market evolves, brokerages are increasingly looking to standardize ways of working and introduce a higher degree of integration into their operating models. This transformation involves employing global redesign to establish unified definitions and rethinking how enterprise-wide processes are managed to enhance quality and control.
Additionally, process standardization and organizational integration must be underpinned by an integrated technology ecosystem across business units and functional groups to enable traceable data flow across the organization and create a single source of truth for managing the business. Tighter integration and standardization lays the foundation for increased efficiency and the ability to generate deeper insights to drive growth:
- Greater corporate leverage and profit protection: Standard operating procedures and tighter integration enable brokers to better integrate non-client-facing activities. Back-office functions such as accounting, IT and human resources can be moved out of agency offices to increase efficiency and focus more on sales and service initiatives.
- Optimize procurement and indirect spend: Acquired organizations often come with a large number of technology licenses and third-party vendors; greater integration can consolidate fragmented vendors and licensing agreements, gaining economies of scale through targeted vendor lists. Additionally, efforts to drive operational standardization will present opportunities to normalize discretionary spending, such as reducing assistive technology projects or solution workarounds.
- Improve data-driven decision-making and accountability: With accurate, usable data, operators can manage their business based on a unique set of insights and gain clarity on what, how and why each insight is measured, including how frontline colleagues who are responsible for the majority of the business impact business performance. The shift toward fact-based decision-making creates focus that empowers leaders to take considered actions with measurable results, reduces the need for broad, unclear actions that often negatively impact the bottom line, and establishes clear accountability for what information needs to be captured in a consistent manner, enabling businesses to leverage insights that are useful to the business and domain.
- Activate new sources of growth:
As M&A conditions become more stringent and the impact of higher renewal prices diminishes, brokers need to be strategic about where their investments grow. Driving organic growth through data is critical, deploying strategies and tools such as generative artificial intelligence Gain deeper insights into revenue-generating roles (e.g., leverage Gen AI to identify cross-sell/up-sell opportunities across the brokerage). Activating synergistic revenue streams by prioritizing investment in new capabilities (e.g., focusing on M&A that brings new products or geographic coverage), increasing the scale of existing markets, or exploring vertical integration opportunities should be an area of focus going forward. We’ve also seen brokerage firms differentiate themselves through industry niches and specializations, linking them with MGAs or affinity partnerships to become preferred distributors for specific industries. Finally, as the E&S market continues to grow, there is a significant opportunity for broker-dealers to expand their business scope to include wholesale operations and capture multiple revenue streams, especially in challenging exposure areas and coverage areas.
- Invest in foundational capabilities and new talent:
As brokerage firms push for higher levels of consolidation, the focus is shifting toward institutions with strong operators rather than those led solely by savvy (sales) entrepreneurs. This change requires a different kind of leadership—one that can manage operators and lead change to respond to increasing market pressures while continuing to deliver shareholder value (e.g., standardizing integrations, enhancing technology, developing and attracting new talent). These skill sets are relatively new to brokerage leadership, and in a federated model consisting of corporate and regional structures and underlying institutions, appointing executives to lead these transformations can be challenging. The ability to influence and drive transformation at all levels is a unique skill.
Four short quick wins to start
While a long-term response to the pressures facing the brokerage industry will require C-suite attention and coordination, we suggest four initial steps brokerage leaders can take:
- Identify priority areas for standardization and centralization: For more decentralized brokers, we first standardize first-level data entry processes (e.g., AMS standard operating procedures), begin moving toward common technologies (e.g., an agent management system), and work to centralize common low-risk activities to demonstrate success and build support for future centralization (e.g., vendor accounts payable, data processing, policy certification, claims processing, etc.).
- Reassessing the M&A agenda: Renew corporate M&A willingness to be more selective; each deal should support the long-term growth agenda and complement the core business. Explore divesting non-core business areas to generate new sources of capital and allow the business to focus on making the business an operating company rather than a holding company.
- Assess business reporting and data gaps: While management can generate financial overviews and operational reports, the fragmented nature of AMS and accounting systems often requires extensive data cleansing to meet these basic reporting requirements. Understand the technical/system environment across the organization (e.g., how AMS instances connect to accounting/financial fact sources) and operational models to map how data flows and identify opportunities to improve data hygiene, integrity, and availability. We see brokers prioritizing a standard approach to completing financial and operational management reporting, laying the foundation for deeper insights.
- Identify priority talent gaps: Decisions to act on the above levers are highly strategic and may be necessary for a brokerage to weather market changes, but executing on these decisions requires talent not typically found at today’s brokerages. Identify core talent gaps (e.g., transformation leadership, business operators, data expertise, industry specialization), pave the way for the future and develop plans to acquire this talent.
We have been and are actively helping brokers cope with this changing situation. Please contact Heather Sullivan, Gina Papas, Robert Held, or Bob Besio If you would like to discuss further.
