By John Block
A recent report from USI found that commercial insurance markets continued to harden in the second quarter, with many lines seeing double-digit rate increases and a corresponding decrease in capacity of at least 25%.
COVID-19 is not the only factor driving this trend. Premiums across most lines increased sharply in the latter half of 2019, interest rates are expected to remain low for at least the next year, and the industry has suffered persistently high loss ratios since 2013.
The continued hardening of the insurance markets will have far-ranging implications up and down the broker ecosystem, surely prompting many tough conversations between brokers and their clients who have grown accustomed to annual rate reductions. Small and regional brokers are likely to be disproportionately affected as carriers restrict capacity in favor of larger, more diversified brokers. The ability for larger brokers to offer greater economies of scale will be a boon to clients who are seeing their rates increase for the first time in years.
As smaller and regional partners encounter access and pricing challenges, they can find respite by partnering with larger platforms that can help drive optimal pricing, provide better infrastructure for enhanced customer service and gain more customers through access to larger carriers. A partnership can also be complementary for larger brokers who are seeking more granular data and better relationships with clients.
Access to a larger platform affords smaller brokers the flexibility to tailor pricing and offer innovative products to meet specific client needs. Joining a larger platform also means investment in critical infrastructure, new technology, systems and processes to help optimize operations and support growth. Key to upgrading technology is the capability to derive and analyze data from competitors, clients and carriers.
According to a 2018 report from SNS Telecom & IT, big data analytics can drive an increase in access to policies by 30%, increase cost savings in claims processing and management by 40%-70%, and accelerate processing of non-emergency insurance claims by 90%. Without a larger platform, smaller brokers may be running blind into a difficult environment. Further, digitizing operations is becoming critical for smaller brokers who will need to adapt to client demand for pricing and coverage transparency and data analytics.
At the same time, it is important for smaller brokers to choose the right partner. A scenario that allows owners to keep an equity stake while gaining access to needed resources, carrier capacity and clients is a “win-win” that brokers should seek out.
Although they will be disproportionately affected by a hardening market, small brokers have a unique value-add in that they can provide more custom “on the ground” service to clients. Large brokers continue to build out broad, distributed networks of offices to support these service relationships and to gain an in-depth understanding of the risks unique to each client’s business.
Larger platforms have an opportunity to pursue a roll-up strategy that can help to diversify both in terms of product expertise and access to the right programs and right markets. The retail brokerage market is attractive because they are sticky, high-recurring revenue businesses, many of which have solid earnings characteristics, stable and steady cash flows, and opportunities to grow both organically and inorganically.
The hardening of the insurance market is creating an inflection point for the broker ecosystem. Well established trends like the use of insurtech to integrate data analytics and predictive intelligence into client relationships are likely to accelerate. So too will broker mergers and acquisitions, which had set record-breaking numbers in consecutive years. Owners of smaller and regional brokers are likely to look to partnerships with larger platforms that offer avenues to collectively weather potential industry challenges and retain an equity stake.
John Block, partner at HGGC and board member, PCF Insurance. He may be contacted at [email protected].
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