Navigating the Next Era of Insurance Brokerage Growth | Insurance blog

The brokerage market has enjoyed a period of sustained growth in revenue, profitability and shareholder value, driven by favorable macroeconomic conditions. M&A activity flourished due to easy access to cheap capital for a robust cash-flow business, while organic growth was fueled by a strengthening rate environment and increased inflation-driven exposure. Shareholder value, including that of financial sponsors and employees, was also supported by a liquid capital market and historically high multiples, marked by a record number of transactions. However, these tailwinds are moderating as market conditions change.

Rising interest rates, record valuations and tightening access to capital have created significant headwinds for M&A activity, with deal flow falling by around 30% in the first 8 months of 2024 compared to the same period in 2023. Despite this slowdown. , M&A remains a crucial strategy for brokers to remain competitive in their offerings to clients and maintain their bargaining power with insurance carriers. Similarly, brokers’ organic growth, largely driven by rate increases, over the past few years — averaging about 8 to 9 percent of annual revenue — is starting to compress as P&C rate increases moderate in some lines of activity. Additionally, the average revenue of the 100 largest private equity-owned brokers and agencies has nearly doubled over the past four years, indicating that more capital than ever is needed to create liquidity events for the largest aggregators .

As macroeconomic headwinds begin to moderate, a critical question arises: How can insurance brokers evolve their strategies to usher in the next era of profitable growth?

There are three long-term levers that the C-suite explores to create and sustain profitable growth:

1. Drive greater standardization and integration

Brokerages that operate with a highly federated model or operate as a holding company rather than an operating company often allow their underlying agencies to operate independently. While this approach offers flexibility and can foster entrepreneurship, it also leads to operational inconsistencies, disconnected technology systems, disparate data sources, and challenges with governance and controls. As the market evolves, brokerages are increasingly looking to standardize ways of working and introduce a greater degree of integration into their operating models. This change involves adopting a global redesign to establish uniform definitions and rethinking how enterprise-wide processes should be managed to improve quality and controls.

In addition, process standardization and agency integration must be anchored by 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 management. Tighter integration and standardization form the foundation for improved efficiency and the ability to generate better insights to drive growth:

• Higher enterprise leverage and margin preservation: Standard operating procedures and tighter integration allow 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 create efficiencies and enable greater focus on sales and service initiatives.
• Optimized purchases and indirect expenses: Acquired agencies typically come with their own range of technology licenses and third-party providers; a greater degree of integration enables the consolidation of fragmented supplier and license agreements, achieving economies of scale with a targeted supplier list. Additionally, efforts to drive operational standardization will introduce opportunities to normalize discretionary spending, such as reducing secondary technology projects or workarounds.
• Improved data-driven decisions and accountability: With accurate and available data, operators can govern their business on a distinct set of information, with a clear understanding of what, how and why each piece of information is measured, including how frontline colleagues who operate much of the business, influences the performance of the enterprise. 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 moves that often negatively impact margins—and creates clear accountability for the information to be captured in a consistent fashion, allowing the enterprise to capitalize on knowledge useful to the enterprise and the field.

2. Activate new sources of growth:

With more restrictive M&A terms and moderate headwinds from rising renewal prices, brokers need to be strategic about where to invest in growth. Driving organic growth through data is essential, implementing strategies and tools such as Generative AI to gain deeper insights for revenue-generating roles (eg, leveraging Gen AI to identify cross-sell/up-sell opportunities in the brokerage book). Enabling synergistic revenue streams by prioritizing investment in new capabilities (eg, focusing on M&A that brings new products or geographic coverage), increasing scale in existing markets, or exploring vertical integration opportunities should be key areas of focus moving forward . We are also seeing brokerages differentiate themselves through industry niches and specializations, linking them with MGAs or affinity partnerships to become industry-specific distributors of reference. Finally, as the E&S market continues to grow, brokerages have a significant opportunity to expand their scope to include wholesale business, capturing multiple revenue streams, particularly in exposure areas and difficult hedging lines .

3. Invest in core capabilities and new talent:

As brokerages drive greater levels of integration, the focus is shifting to agencies with strong operators rather than those run solely by skilled (sales) entrepreneurs. This shift requires a different leadership profile – one that can manage operators and drive the transformations needed to meet increasing market pressures while delivering shareholder value (eg, standardizing integration, improving technology, building and attracting new talents). Such skills are relatively fresh for brokerage leadership, and assigning executives to lead these transformations can be challenging in a federated model composed of corporate and regional structures and underlying agencies. The ability to influence and drive transformation at all layers is a distinctive skill set.

Four quick wins in the short term to start

While the longer-term response to the pressures facing the brokerage industry will require focus and coordination from the C-Suite, we recommend four initial steps brokerage leaders can take to get started:

1. Identify priority areas for standardization and centralization: For more fragmented brokers, we start by standardizing data entry processes at level one (e.g. AMS standard operating procedures), begin moving to common technologies (e.g. an agency management system) and we work to centralize low-risk common activities to demonstrate success and gain buy-in for future centralization (e.g. accounts payable, data processing, policy certifications, complaint handling, etc.).
2. Reevaluate your M&A agenda: Update M&A appetite to be more selective; each transaction should support a long-term growth agenda and be complementary to the core business. Explore non-core areas of business divestment to generate new sources of capital and allow the business to focus on what will enable the business to be an operating company, not a holding company.
3. Assess trade reporting and data gaps: While management can generate financial analysis and operational reports, the fragmented nature of AMS and accounting systems often requires extensive data cleansing to meet these fundamental reporting requirements. Understand the technology/systems landscape (eg how AMS instances connect to the accounting/financial source of truth) and operating models within the organization to map how data flows and identify opportunities for greater data hygiene, integrity and availability. We see brokers prioritizing standard ways of completing financial and operational management reports first to lay the foundation for deeper insights.
4. Determine priority talent gaps: The decisions to act on the leverage discussed above are highly strategic and likely necessary for brokerages to withstand changes in the market, but executing these decisions requires talent not typically found in today’s brokerages. Identify key talent gaps (eg transformation leadership, business operators, data expertise, industry specialization) to pave the way forward and develop a plan to acquire this talent.

We have helped and are actively helping brokers navigate this evolving landscape. Please contact Heather Sullivan, Gina Papas, Robert Held or Bob Besio if you want to discuss further.