Navigating the next era of insurance brokerage growth | Insurance Blog

The brokerage market has enjoyed a period of continued growth in revenue, profits, and shareholder value, driven by favorable macroeconomic conditions. M&A activity has boomed due to easy access to cheap capital in a strong cash flow business, while organic growth has been fueled by a strong rate environment and increased exposure to inflation. Shareholder value, including that of financiers and employees, has also been bolstered by a liquid capital market and historically high leverage, marked by a record number of transactions. However, these variables are balanced as market conditions change.

Rising interest rates, record high valuations, and tight access to capital have created significant headwinds for M&A activity, with deal flow falling nearly 30% in the first 8 months of 2024 compared to the same period in 2023. Despite this decline, IM&A remains an important strategy for marketers to remain competitive in their customer offerings and maintain their negotiating power with insurance carriers. Similarly, consumer organic growth, driven largely by rate increases, over the past few years—averaging about 8 to 9% in annual revenue—is beginning to depress as P&C rates rise moderately in other business lines. In addition, the average revenue of the top 100 retailers and private equity-owned agencies has nearly doubled over the past four years, indicating that it takes more money than ever to create capital events for the largest aggregators.

As the macroeconomic environment begins to moderate, an important question arises: How can insurers change their strategies to usher in the next period of profitable growth?

There are three long-term levels that the C-suite evaluates to build and sustain profitable growth:

1. Drive a large level of configuration and integration

Brokerages that operate in a more integrated model or operate more as a holding company than an operating company often allow their subsidiaries to operate independently. While this approach provides flexibility and can foster an entrepreneurial spirit, it also leads to operational inconsistencies, disconnected technical systems, disparate data sources, and management and control challenges. As the market evolves, brokerages are increasingly seeking to standardize operating methods and introduce a higher level of integration into their operating models. This change involves adopting a global redesign to establish common definitions and rethinking how business-wide processes should be managed to improve quality and control.

In addition, standardization and integration of the agency must be supported by an integrated technology ecosystem that includes business units and functional groups to enable the flow of traceable data throughout the organization and create a single source of truth for business management. Tight integration and standardization form the basis for improved performance and the ability to generate more data to drive growth:

• Business growth and margin preservation: Standard operating procedures and tight integration enable retailers to better integrate non-customer-facing operations. Back office functions such as accounting, IT, and HR can be moved out of the agency office to create efficiencies and enable greater focus on sales and service initiatives.
• Organized purchases and indirect spending: Acquired agencies often come with a bunch of technology licenses and third-party vendors; The greater level of integration allows the integration of different sales agreements and licenses, achieving economies of scale with a range of targeted retailers. Additionally, efforts to drive operational standardization will present opportunities to normalize discretionary spending, such as reducing side tech projects or solution workarounds.
• Improved data-driven decisions and accountability: With accurate, available data, operators can manage their business with a unique set of insights with a clear understanding of what, how, and why each insight is measured, including how their frontline partners, who run the bulk of the business, impact business performance. Shifting to evidence-based decision-making creates focus and enables leaders to take calculated actions with measurable results, reducing the need for broad, ill-defined measures that often have a negative impact on margins – and creates clear accountability for what information needs to be recorded. consistent fashion, which allows the business to use information that is useful to the business and the sector.

2. Activate new sources of growth:

With more limited M&A conditions and moderating renewal price increases, retailers need to be strategic about where to invest for growth. Driving organic growth through the use of data is essential, using the same strategies and tools Generative AI for deep insights into revenue generation roles (eg, using Gen AI to identify sales/upsell opportunities across the book of business). Enabling integrated revenue streams by prioritizing investment in new capabilities (eg, focusing on M&A that brings new products or geographic coverage), increasing scale within existing markets, or exploring vertical integration opportunities should be key areas for moving forward. We also see brokerages diversifying through industry pieces and expertise, combining these into MGAs or affinity partnerships to become distributors for specific industries. Finally, as the E&S market continues to grow, brokerages have a significant opportunity to expand their scope to include larger businesses, capturing multiple revenue streams, especially in challenging exposures and consolidation lines.

3. Invest in core competencies and new talent:

As brokerages drive greater levels of consolidation, the focus is on agencies with strong staff rather than those led by experienced (sales) entrepreneurs. This change requires a unique leadership profile—one that can manage operators and lead the transformation needed to respond to growing market pressures while consistently delivering shareholder value (eg, aligning equity, developing technology, building and attracting new talent). These skills are new to the leadership of brokerages, and managers appointed to lead these changes can be a challenge to the collective model created by corporate and regional structures, and basic agencies. The ability to influence and drive change at all levels is a unique skill set.

Four short-term quick wins to get you started

While a long-term response to the pressures facing the brokerage industry will require focus and communication by the C-Suite, we recommend four first steps brokerage leaders can take to get started:

1. Find the key points for positioning and positioning: For different customers, we start by setting up basic data entry processes (eg, AMS standard operating procedures), start to move to standard technology (eg, single agency management system), and work to integrate low-risk standard operations to demonstrate success and build purchases for future replacement (eg, vendor payments, data processing, policy validation, claims management, etc.).
2. Re-examine the M&A agenda: Review corporate M&A interest to be more selective; each transaction must support a long-term growth agenda and align with the core business. Explore non-core business diversification areas to generate new revenue streams and allow the business to focus on what will make the business a viable company, not a holding company.
3. Check business reporting and data gaps: Although managers can generate financial overviews and performance reports, the disparate nature of AMS and accounting systems often requires extensive data cleansing to meet these important reporting requirements. Understand the technology/systems landscape (eg, how AMS scenarios connect to the Accounting/Financial source of truth) and operational models across the organization to map how data flows and identify opportunities for greater data cleanliness, integrity, and availability. We’re seeing marketers start by prioritizing standard ways to complete financial management and performance reporting to lay the foundation for deeper insights.
4. Determine key talent gaps: The decisions to use the levers mentioned above are highly strategic and may be necessary for brokerages to resist market changes, but making these decisions requires talent that is not often found in today’s brokerages. Identify key talent gaps (e.g., transformational leadership, business operators, data literacy, industry expertise) to pave the way ahead and develop a plan to acquire this talent.

We have helped and continue to help brokerages navigate this dynamic industry. Please reach Heather Sullivan, Gina Papas, Robert Held, or Bob Besio if you would like to discuss further.