Navigating the Next Era of Growth in Insurance Brokerage

The insurance brokerage market has enjoyed a remarkable period of growth, marked by increased revenue, profitability, and shareholder value. This success has been driven by favorable macroeconomic conditions, flourishing M&A activity, and a hardening rate environment. The ease of access to inexpensive capital, combined with a robust cash flow business, has allowed for an unprecedented number of transactions, significantly enhancing shareholder value. However, the landscape is shifting, and the tailwinds that once propelled the industry are beginning to moderate.

In 2024, the insurance brokerage sector faces new challenges as interest rates surge, valuations reach record highs, and access to capital tightens. These factors have created significant headwinds for M&A activity, leading to a decline in deal flow by about 30% in the first eight months of the year compared to the same period in 2023. Despite this slowdown, M&A remains a crucial strategy for brokers to stay competitive and maintain their negotiating power with insurance carriers. Meanwhile, organic growth, which has been driven largely by rate increases, is beginning to compress as property and casualty (P&C) rate hikes moderate. The average revenue of the 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 these macroeconomic tailwinds subside, a critical question arises: How can insurance brokers evolve their strategies to usher in the next era of profitable growth?

Leveraging Standardization and Integration

To sustain growth in a challenging environment, brokerages must drive greater standardization and integration across their operations. Historically, many brokerages have operated with a highly federated model, allowing their underlying agencies to function independently. While this approach offers flexibility and promotes 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.

Process standardization and agency integration must be anchored by an integrated technology ecosystem spanning business segments and functional groups. This enables traceable data flow throughout the organization, creating 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.

Maximizing 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, creating efficiencies and allowing a greater focus on sales and service initiatives.

Acquired agencies often bring a host of technology licenses and third-party vendors. A greater degree of integration allows for the consolidation of fragmented vendor and licensing agreements, gaining economies of scale with a targeted vendor list. Additionally, efforts to drive operational standardization introduce opportunities to normalize discretionary spending, such as reducing side tech projects or solution workarounds.

With accurate and 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. This shift to fact-based decision-making creates focus and enables leaders to take calculated actions with measurable results. It also creates clear accountability for capturing consistent information, allowing the enterprise to harness insights useful to both the enterprise and the field.

Activating New Sources of Growth

In a landscape where M&A conditions are more restrictive and renewal pricing increases are moderating, 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 can gain deeper insights for revenue-generating roles, such as identifying cross-sell and up-sell opportunities across the brokerage book of business.

Activating synergistic revenue streams by prioritizing investments in new capabilities, enhancing scale within existing markets, or exploring vertical integration opportunities should be key areas of focus moving forward. Brokerages can differentiate themselves through industry niches and specialization, tying these to managing general agents (MGAs) or affinity partnerships to become go-to distributors for specific industries. The growth of the excess and surplus (E&S) market presents brokerages with significant opportunities to expand their scope to include wholesale business, capturing multiple revenue streams, especially in challenging exposure areas and coverage lines.

Investing 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 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 that will be increasingly valuable as brokerages navigate this evolving landscape.

Four Short-Term Quick Wins

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:

1. Identify Priority Areas for Standardization and Centralization: For more fragmented brokers, start by standardizing level one data-entry processes, such as agency management system (AMS) standard operating procedures. Begin to move toward common technologies, like a unified AMS, and work towards centralizing common low-risk activities to show success and build buy-in for future centralization.
2. Re-evaluate the M&A Agenda: Update the 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 becoming an operating company, not a holding company.
3. Assess Business Reporting and Data Gaps: Understand the technology and systems landscape, particularly how AMS instances connect to the accounting/finance source of truth. Map how data flows across the organization and identify opportunities for greater data hygiene, integrity, and availability. Prioritize standard ways of completing financial and operational management reporting to set the foundation for deeper insights.
4. Determine Priority Talent Gaps: Identify core talent gaps, such as transformation leadership, business operators, data expertise, and industry specialization, to pave the road ahead. Develop a plan for acquiring this talent to execute strategic decisions and withstand changes in the market.

At DOXA, we’ve helped and are actively helping brokerages navigate this evolving landscape. Please reach out to us to discuss how we can support your journey into the next era of growth.