Navigating the next era of growth in insurance brokerage

The brokerage market has enjoyed a period of sustained revenue growth, profitability, and shareholder value, driven by favorable macroeconomic conditions. M&A activity has flourished due to easy access to inexpensive capital on a robust cash flow business, while organic growth has been fueled by a hardening rate environment and inflation-driven exposure increases. Shareholder value, including that of financial sponsors and employees, has also been bolstered by a liquid capital market and historically high multiples, marked by a record number of transactions. However, these tailwinds are moderating as market conditions shift.

The surge in interest rates, record-high valuations, and tightened access to capital have created significant headwinds for M&A activity, with deal flow declining by about 30% through the first 8 months of 2024 compared to the same period in 2023. Despite this slowdown, M&A remains a crucial strategy for brokers to stay competitive in their offerings to clients and maintain their negotiating power with insurance carriers. Similarly, brokers’ organic growth, driven largely by increases in rate, over the past several years—averaging around 8 to 9% in annual revenue—is beginning to compress as P&C rate hikes moderate in some lines of business. Further, the average revenue of top 100 brokers and agencies held by private equity has nearly doubled in the past four years indicating that it takes more capital than ever to create liquidity events for the largest aggregators.

As the macroeconomic tailwinds begin to moderate, a critical question emerges: How can insurance brokers evolve their strategies to usher in the next era of profitable growth?

There are three longer-term levers the C-suite is exploring to create and sustain profitable growth:

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 to drive growth:

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.

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 (e.g., leveraging Gen AI to identify cross-sell/up-sell opportunities across the brokerage book of business). Activating synergistic revenue streams by prioritizing investments in new capabilities (e.g., 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. We also see brokerages differentiating 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.

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 (e.g., 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.

Four short-term quick wins to get started

While the longer-term response to the pressures facing the brokerage industry will require focus and coordination by the C-Suite, we recommend four initial steps brokerage leaders can take to get started:

Identify priority areas for standardization and centralization: For more fragmented brokers, we start by standardizing level one data-entry processes (e.g., AMS standard operating procedures), begin to move toward common technologies (e.g., one agency management system), and work towards centralizing common low-risk activities to show success and build buy-in for future centralization (e.g., 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 complimentary 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. Understand the technology/ systems landscape (e.g., how AMS instances 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. We see brokers first prioritizing 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 (e.g., transformation leadership, business operators, data expertise, industry specialization) to pave the road ahead and develop a plan for acquiring this talent.

We’ve helped and are actively helping brokerages navigate this evolving landscape. Please reach out to Heather Sullivan, Gina Papas, Robert Held, or Bob Besio if you’d like to discuss further.