Consolidation and ‘buy and build’ strategies have allowed considerable value to be realised through valuation multiples arbitrage, increased buying power from capacity providers, and cost synergies.
While consolidation has proceeded at a variable pace, there remains considerable opportunity in most jurisdictions to continue ‘buy and build’ strategies with little apparent competition. Where the target pool has started to diminish, it is increasingly important to be positioned as both the ‘buyer of choice’ and the ‘buyer of means’, with well-defined and executed targeting and integration plans to realise the benefits of consolidation.
Creating sophistication in organic premium growth ― from ‘farmers’ to ‘hunters'
A constant due diligence question for investors is “So what happens to this business when the M&A flywheel slows down?”
A key part of the answer is a renewed emphasis on organic growth. For most of the industry, low single-digit organic growth rates have long been considered adequate when there is an attractive renewal annuity revenue stream and EBITDA is being added through acquisitions. However, this largely reflects a limited focus on the fundamental principles of commercial effectiveness and sales management to enable organic growth.
There are often significant opportunities to work with existing customers to:
- Understand the evolution of their risk profiles and drive additional coverage limits
- Unlock the considerable cross-selling opportunity where, for example, products like D&O or cyber have relevance but have not been discussed with clients
- Realise the opportunity to build specialist insurance businesses (e.g. HNW) that share buying points with core B2B/SME customer relationships
- Adopt other products/propositions (e.g. employee benefits, disability products, health insurance) where the broker may have or could build capabilities
Equally, there are opportunities to drive new customer growth through an explicit focus on volume growth within the business, supported by targeted marketing, and the development of specialist schemes/delegated authority business to retail customers and on a wholesale basis to smaller brokers.
These growth initiatives do not come easily to businesses that have locally embedded ways of working. However, a well-designed programme that provides sales support mechanisms and incentive structures to change behaviours can often help in transforming organisational culture. In our experience, this transition from ‘farmers’ to ‘hunters’ at the front line of the company can quickly accelerate organic premium growth to double-digit rates, with the business becoming a more sophisticated and rounded risk management advisor for clients.
Sophisticated capacity management
Brokers have long relied on stable insurer partner capacity that is available on favourable terms and rates. However, they typically do not expend enough effort to assess the composition and fragmentation of their panel, which can often run into hundreds of insurers, as well as leakage to wholesale brokers. A rationalised and systematic approach to capacity management can usually yield sustainable income uplifts.
Furthermore, and sometimes despite the best of efforts, the benefits of profitable business accruing from brokers’ proximity to the customer and their management of the insured are not always passed through by the insurer partners. Those partners also do not fully reflect the needs of the customers in terms of product design.
Understanding whether brokers are capturing their fair value requires a close and data-led partnership with the insurers whereby returns are shared equably through enhanced commission rates or profit commissions (where permitted by regulation). This requires full clarity on the performance of a broker’s book with respect to the insurer P&L and what value they are driving for their partners. Building this intelligence requires disaggregating claims from the allocation of expenses borne in distributing and administering a policy, and from the costs of carrying the risk on the insurer’s balance sheet. Where such a partnership and ‘fair’ distribution of performance is not possible, finding alternative local insurer supply may be the first alternative, leveraging the scale of the broker.
There is also potential for a greater value opportunity in finding alternative capacity. This is more common in personal lines insurance where reinsurers have funded the emergence of a series of virtual insurers (e.g. Hastings, The AA), and they are increasingly embracing the opportunity to deploy capital to commercial lines MGAs run by brokers where there is evidence of underwriting capability and claims management experience.
This approach raises questions about the future structure of insurance distribution and the role of the various participants in the value chain. It is undeniably true that some brokers have the opportunity to realise further value and create better customer outcomes through their participation in the underwriting layer. This includes the development of schemes or delegated authority agreements with markets and, ultimately, MGAs (see Figure 3).