The brokerage market has enjoyed a period of sustained revenue growth, profitability and shareholder value due to favorable macroeconomic conditions. M&A activities flourish because they have easy access to cheap capital in a robust cash flow business, but organic growth is driven by hardening environments and inflation-driven exposure. Shareholder values, including financial sponsors and employees, are also strengthened by liquid capital markets and historically high multiples marked in record numbers of transactions. However, these tailwinds have eased as market conditions change.
The surge in interest rates, record valuations and enhanced access to capital has created a major headwind for M&A activities. In the first eight months of 2024, trading flows fell by about 30% Compared to the same period in 2023. Despite this slowdown, M&A remains a key strategy for brokers to remain competitive with clients and maintain negotiation power with insurers. Similarly, the organic growth of brokers driven primarily by speed increases over the past few years –Average 8-9% annual revenue– P&C rate hikes are beginning to compress as they hike moderately on several business lines. Additionally, the average revenues for the top 100 brokers and agents held by private equity are: It’s almost doubled in the last four years It shows that creating the largest aggregator liquidity event requires more capital than ever before.
When the macroeconomic tailwinds begin to ease, important questions arise. How can insurance brokers evolve their strategies to guide the next era of profitable growth?
There are three long-term levers that C-suite is exploring to generate and maintain beneficial growth.
- Drive more standardization and integration
Securities companies that act as companies with a highly federal model or function rather than operating companies, often allow the underlying institution to operate independently. This approach offers flexibility and can promote entrepreneurship, but also leads to operational conflicts, severed technology systems, different data sources, and governance and control challenges. As the market evolves, brokerages are seeking to standardize their working methods and introduce sophisticated integration into their operating models. This shift includes adopting global redesigns to establish a unified definition and rethinking how to manage processes across the enterprise to enhance quality and control.
Furthermore, process standardization and agency integration allow for trackable data flows across the organization, and integration spans business segments and functional groups to create a single source of truth for managing your business. It needs to be fixed in the technology ecosystem. More stringent integration and standardization form the basis of our ability to improve efficiency and generate greater insights to drive growth.
- Larger Enterprise Leverage and Margin Saving: Standard operating procedures and integration allow brokers to better integrate non-client facing activities. Back-office functions such as accounting, IT, and HR can shift from agency offices to generate efficiency and focus on sales and service initiatives.
- Optimized procurement and indirect spending: Acquisition agencies usually come with many technology licenses and third-party vendors. A high degree of integration allows for consolidation of license agreements with fragmented vendors, allowing you to acquire economies of scale with a targeted vendor list. Furthermore, efforts to promote operational standardization will introduce opportunities to normalize discretionary spending, such as reducing side-tech projects and workarounds for solutions.
- Improved data-driven decisions and accountabilityWith accurate and available data, operators are measured how, how and why each insight is measured, including how frontline colleagues running many of their businesses impact enterprise performance. You can understand and manage your business with a clear set of insights. The shift to fact-based decision-making creates focus, reducing the need for broad and uncertain movements that often negatively affect margins, and which leads to leaders performing calculated actions with measurable results. It creates clear accountability as to whether information needs to be captured. It is consistent fashion, ensuring that companies can utilize insights that will help their businesses and their fields.
- Activate new growth sources:
With more restrictive M&A terms and tailbone mitigation due to increased renewal prices, brokers need to be strategic about where they invest in growth. It is essential to promote organic growth through data, and deploy strategies and tools Generation AI To gain deeper insight into revenue-generating roles (e.g. leverage Gen AI to identify cross-sell/up-sell opportunities across the Busing Book book). Activate a stream of synergistic revenue by prioritizing investing in new capabilities (e.g., focusing on M&As that bring new products and geographic coverage), strengthen the scale within existing markets, and vertically integrate Exploring opportunities is an important area of progress. We also see brokers distinguish themselves through industry niches and specialization, linking these to MGA or affinity partnerships, becoming deployers in a particular industry. Finally, as the E&S market continues to grow, brokerages have a great opportunity to expand their range to include wholesale businesses, particularly in challenging exposure areas and coverage lines, and acquire multiple revenue streams .
- Invest in basic abilities and new talent:
As brokerages promote greater levels of integration, the focus is shifting to institutions with strong operators rather than being led by savvy (sales) entrepreneurs alone. This change requires a different leadership profile. It will continue to deliver shareholder value while managing operators and leading the transformation needed to meet growing market pressures (standardizing integration, strengthening technology, building new talent, attracting etc.). Such a skill set is relatively fresh to mediate leadership, and it is the executives who acquire executives to lead these transformations, consisting of the corporate and regional structures, as well as the underlying institutions. Federal models can be challenging. The ability to influence and promote transformation across all layers is a unique skill set.
4 short-term quick wins to start
The long-term response to the pressures facing the securities industry will require focus and adjustments by C-Suite, but four initial steps should be taken to start by the leaders of the securities company. .
- Identify priority areas for standardization and centralizationFor more fragmented brokers, standardize the level 1 data entry process (such as AMS standard operating procedures) and begin to migrate to general technology (one agency management system), with general low-risk activities Start by working towards focusing. Show success and build buy-ins for future centralization (e.g. vendor accounts payable, data processing, policy authentication, billing processing, etc.).
- Reevaluate the M&A Agenda: Update Enterprise M&A appetite to make it more selective. Each transaction must support a long-term growth agenda and complement your core business. Explore non-core business sales areas to create new sources of capital and allow companies to focus on what enables them to become business companies rather than holding companies.
- Evaluate business reports and data gaps: Management can generate financial overviews and operational reports, but the fragmented nature of AMS and accounting systems requires extensive data cleansing to meet these basic reporting requirements It is often the case. Understand technology/system landscapes (how AMS instances connect to the source of accounting/finance truth) and operational models across the organization to identify data flow and opportunities for data hygiene, integrity and availability; Identify it. Brokers first prioritize standard ways to complete financial and operational management reporting, setting the foundation for deeper insights.
- Determine the gap in prioritization talent: The decision to act on the lever above is very strategic and likely to be necessary for brokers to withstand market changes, but to implement these decisions, today’s brokers It requires talent that is not commonly seen in this. Identify core talent gaps (e.g., transformation leadership, business operators, data expertise, industry specialization, etc.) to pave the way forward and develop plans to acquire this talent.
We support and actively support brokerages navigate this evolving landscape. Please reach out Heather Sullivan, Gina Papas, Robert hugged meor Bob Besio If you want to discuss more.
