Consolidation, commissions and the rise of independent brokers
Insurance brokerage M&A activity could lead to more nimble, forward-thinking independent brokers who fully embrace transparency and objectivity.
Over the past few years, there has been significant growth in insurance brokerage M&A activity. 2019 set a record for the total number of transactions in the industry. And while 2020 may see M&A drop by a small margin because of COVID-19, experts are predicting a spike in mergers once again in 2021.
The top acquirers have remained the same over the past few years: Acrisure, HUB and AssuredPartners, all owned by private equity (PE) firms. As PE firms roll-up independent brokers, consolidation continues to be detrimental to both carriers and customers for a number of reasons, including power shifting into brokers’ hands and fewer choices for customers. At the same time, consolidation could lead to a resurgence of new, nimble, and forward-thinking independent brokers who fully embrace transparency and objectivity as they deliver the services that clients want and need.
Pulling back the curtain
The motivation behind consolidation is fairly obvious: Large brokers can generate more revenue by leveraging the amount of business they have with carriers while streamlining operating costs. Often, we will hear leaders from both sides of a merger claim that the surviving firm will “drive innovation” and “accelerate the creation of new solutions.”
However, the evidence of such innovation and new solutions is scant, at best. If we pull back the curtain, the biggest advantage these consolidated firms have is their ability to maximize their commissions.
Commissions have forever plagued the insurance industry because they create an underlying conflict of interest. While every customer is trying to contain or reduce their insurance costs, brokers have a financial incentive to see premiums, and their corresponding commission, increase.
To make matters worse, mergers and acquisitions often mean changes in personnel and account management transfers to service centers. Thus, consolidation adds to the challenge of customer trust — something with which the industry has long struggled.
Commissions also negatively impact the broker-carrier relationship; they represent the second-largest expense for carriers behind paid losses. And while carriers ultimately are concerned with their net premium figures, they still have to play the game of increasing commission rates to compete with other carriers for new and renewal business. They can’t break the cycle without risking brokers moving business from them to another carrier that’s willing to pay a higher commission.
As time goes on and brokers merge and consolidate, their pool of clients grows ever larger, making the brokers increasingly powerful. To that end, industry consolidation can be seen as nothing more than a commission grab.
Uncertainty breeds opportunity
For a broker’s senior management team, consolidation could mean an enticing payday. For everyone else, a merger means uncertainty more than anything else. The combination of early retirements and layoffs, along with business moving to service centers or new account management teams, will inevitably lead to disruption.
But where there is uncertainty, there is always opportunity. The current wave of mergers and acquisitions should lead to an exciting resurgence of new firms to fill the void.
As mergers continue, customers are almost certainly going to become disillusioned with the large, aggregating brokers and their underwhelming, off-the-shelf service. Brokers that were considered valuable consultative resources in the past could begin pushing their clients off on call centers where employees know little about each business and care even less. The innovation and resources that merger press releases advertise often give way to complacency and shortcuts. Organizations will likely lose the personal relationship they had with their broker — and the only way that they will get that back is to find a true trusted advisor elsewhere, one committed to client service.
They’ll seek out a broker that can offer a more nimble and entrepreneurial kind of service. As Andrew Holderness, global head of Clyde & Co’s Corporate Insurance Group, recently said, “A lot of [smaller brokers] do not strive to be the size of the big three; they see it as a unique selling feature that they’re not. And some of them are fiercely independent.”
This is an opportunity not only for existing independent brokers but also for other talented people who have been let go or put in a position where they don’t feel they can deliver the level of service and expertise they’ve grown accustomed to delivering. We’ll see many of those people strike out on their own and attract wayward insurance buyers who are looking for a more personalized experience.
The benefits of independence
Those who choose to start out on their own have the opportunity to change the industry as we know it. We’ll start to see boutique and independent brokers who refuse to play into the conflict of interest of commissions — who want to give their customers a new way of buying and managing insurance. They’ll get paid for the value they provide, not the amount of insurance their clients are willing to pay for. With more personalized customer experience and completely objective insurance advice, these small independent brokers will be hard for the big guys to beat. Down the road, we’ll eventually see the decline of commission-driven brokers across the industry.
We could look at broker consolidation through a negative lens and say that it will harm the insurance industry. But that’s not right. Consolidation is really just the next wave in what is a typical business cycle.
We’ve seen this cycle of disruption in other industries before. Big corporations come in and take over, making big promises to their employees and their clients and fall short on all fronts. Service becomes commoditized, and then an afterthought.
Individuals with an entrepreneurial streak set out on their own to create what they and their clients know is a better way. They succeed, and even more importantly, their clients are the beneficiaries.
The future of the insurance brokerage business is bright, but in order to stay relevant, let alone thrive, it needs to completely rethink how it gets paid for the value it provides.
Charlie Wilmerding (cwilmerding@altuspartners.com) is the founder and CEO of Altus Partners. He started Altus in 1997 with the purpose of changing the way that property and casualty insurance is bought and managed. These opinions are his own.
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