The brokerage industry is adapting to a changing landscape as macroeconomic conditions temper the tailwinds that have driven growth in recent years. High interest rates, historical valuations, and tighter access to capital have slowed M&A activity, with deal flow declining nearly 20% in the first nine months of 2024 compared to the same period in 2023. Meanwhile, moderating renewal rate increases in the property & casualty market—a reliable driver of organic revenue growth—are further pressuring brokers to adopt new strategies.
While these shifts create new challenges, they also present opportunities for brokerages to focus on margin expansion, activate new sources of growth, and invest in new capabilities and talent to navigate the evolving environment.
Opportunities in a Shifting Market
While still a highly favorable macroeconomic market for brokerage, M&A activity that flourished previously was fueled by easy access to affordable capital and robust cash flows. Simultaneously, organic growth was supported by a hardening rate environment and inflation-driven exposure increases, contributing to strong financial performance. Shareholder value, including that of financial sponsors and employees, benefited from more liquid capital markets and historically high valuation multiples, driving record transaction volumes.
As these conditions moderate, brokers are navigating a more complex landscape. Organic growth, which averaged 8% to 9% in recent years due to rate and exposure growth, is beginning to soften as property & casualty insurance rate increases level off in certain areas. Meanwhile, the revenue of the top 100 brokers and agencies owned by private equity firms has nearly doubled over the past four years, underscoring the increasing complexity and resource demands of executing recapitalizations or other liquidity events involving new private equity or alternative investments.
As macroeconomic conditions shift, insurance brokers must explore new ways to adapt their strategies, capitalizing on opportunities to usher in a new phase of profitable growth.
To begin addressing the immediate challenges in the brokerage industry, here are four initial steps that brokerage leaders can take, while longer-term responses will require focused coordination by the C-Suite:
- Identify priority areas for standardization and centralization. For more fragmented brokers, it is important to standardize level one, data-entry processes (such as agency management services (AMS) standard operating procedures) to begin to move toward common technologies and work toward centralizing common low-risk activities to show success and build buy-in for future centralization (including vendor payables, data processing, policy certifications, claims handling etc.)
- Re-evaluate M&A agenda. Update enterprise M&A appetite to be more selective; each transaction should support a long-term growth agenda and be complementary to the core business. Explore divesting areas of the business that are non-core to generate new sources of capital and allow the enterprise to focus on what will enable the business to be an operating company, not a holding company.
- Assess business reporting and data gaps. While management can generate financial overviews and operational reports, the fragmented nature of AMS and accounting systems often requires extensive data cleansing to fulfill these fundamental reporting requirements. It’s important to understand the technology/ systems landscape (for example, how AMS systems connect to accounting/ finance source of truth) and operating models across the organization to map how data flows and identify opportunities for greater data hygiene, integrity and availability. Brokers should first prioritize standard ways of completing financial and operational management reporting to set the foundation for deeper insights.
- Determine priority talent gaps. Decisions to act on the levers 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 core talent gaps (such as transformational leadership, business operators, data expertise, industry specialization) to pave the road ahead and develop a plan for acquiring or outsourcing this talent.
Long-term Solutions for Sustained Growth and Profitability
To address the challenges facing the brokerage industry, longer-term solutions will require substantial focus and coordination by the C-Suite. The following levers are key to creating and sustaining profitable growth over the long-term:
1. Drive a greater degree of standardization and integration. Brokerages that operate with a highly federated model or function more as a holding company rather than an operating company often allow their underlying agencies to operate independently. While this approach offers flexibility and can promote an entrepreneurial spirit, 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 seeking to standardize ways of working and introduce a higher degree of integration in their operating models. This shift involves adopting a global redesign to establish uniform definitions and rethinking how enterprise-wide processes should be managed to enhance quality and controls.
Further, process standardization and agency integration must be anchored by an integrated technology ecosystem spanning business segments and functional groups to enable traceable data flow throughout the organization and create a single source of truth for managing the business. Tighter integration and standardization form the foundation for improved efficiencies and the ability to generate greater insights, which will enable brokers to maximize the following value levers:
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- Greater enterprise leverage and margin preservation: Standard operating procedures and tighter integration enable brokers to better consolidate non-client-facing activities. Back-office functions such as accounting, IT and HR can be shifted out of the agency office to create efficiencies and enable greater focus on sales and service initiatives.
- Optimized procurement and indirect spend: Acquired agencies typically come with their host of technology licenses and third-party vendors; a greater degree of integration allows consolidation of fragmented vendor and licensing agreements, gaining economies of scale with a targeted vendor list. Additionally, efforts to drive operational standardization will introduce 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 govern their business on a distinct set of insights with a clear understanding of what, how and why each insight is measured, including how frontline colleagues, who operate much of the business, impact enterprise performance. The shift 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 what information needs to be captured in a consistent fashion, enabling the enterprise to harness the insights useful to the enterprise and the field.
2. Activate new sources of growth. With more restrictive M&A conditions and moderating tailwinds from renewal pricing increases, brokers need to be strategic about where to invest in growth. Driving organic growth through data is essential, deploying strategies and tools like generative AI to gain deeper insights for revenue-generating roles (such as leveraging genAI to identify cross-sell/up-sell opportunities across the brokerage book of business). Activating synergistic revenue streams by prioritizing investments in new capabilities (such as focusing on M&A that brings new products or geographic coverage), enhancing scale within existing markets or exploring vertical integration opportunities should be key areas of focus moving forward. Brokerages can also differentiate themselves through industry niches and specialization, tying these to MGAs or affinity partnerships to become go-to distributors for specific industries. Lastly, 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, especially in challenging exposure areas and coverage lines.
3. Invest in foundational capabilities and new talent: As brokerages drive greater levels of integration, the focus is shifting toward agencies with strong operators rather than those solely led by savvy (sales) entrepreneurs. This change demands a different leadership profile — one that can manage operators and lead the transformations required to respond to growing market pressures while continuously delivering shareholder value (such as standardizing integration, enhancing technology, building and attracting new talent). Such skillsets are relatively fresh to brokerage leadership, and earmarking 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 across all layers is a distinctive skillset.
Private Equity Investors
Despite a shifting landscape, private equity firms are increasingly focusing on the insurance brokerage sector. The capital-light nature of brokerages paired with the annuity-like structure of a renewal-based business, makes them an ideal target for investment.
As a compulsory product, insurance demand has yet to go down in the last decade and, as a result, private equity can leverage smart financial engineering of debt leverage with little upfront capital to purchase businesses that have a near certain guarantee of approximately 85% renewal revenue annually. Additionally, given that insurance brokerage businesses generally have no claim or credit risk exposure, but continue to yield a strong cash flow, they have proven and continue to prove to be attractive investments.
However, as the size of brokerages continue to grow and the multiples commanded at that size continue to stay in the high double digits, the liquidity paths have narrowed. It is critical that brokerages act on the long and short-term actions noted to build a sustainable, long-term business that remains a viable competitor in a crowded market — a seemingly mandatory requirement of any liquidity path.
Topics Mergers & Acquisitions Agencies
