The M&A market for P&C brokers in Canada and the US is white hot. Private equity-backed insurance brokers are leading the way with 76% of all transactions for the first half of 2022. The only thing slowing this trend down is an ever-shrinking group of sellers.
The winners, despite reporting, aren’t the buyers who score more acquisitions. With the amount of money being thrown about, acquiring a P&C broker isn’t difficult for PE backed buyers. The real winners will be those that are not only able to acquire but make the necessary return on capital that makes sense. This translates to current efficiency advantages that an acquirer has over others and their ability to earn more economic profit using less resource.
This article highlights the efficiency drivers and how to take advantage of the biggest opportunity in the insurance distribution vertical without breaking a sweat.
Insurance Brokers a Bright Light on the Dark Horizon of Insurance Distribution
The race for broker acquisitions comes as no surprise, as Insurance brokers are the only bright light in an overall weak economic profit experience for the industry as a whole. McKinsey examined 96 industries and structured these two charts on what the economic profit is for insurance in their “Creating value, finding focus: Global Insurance Report 2022”:
Acquisition creates scale of economy and efficiencies for greater savings and offers brand building benefits. However, it is a competitive market and that means higher prices and ultimately reduced returns. There is a way to be more competitive in this hot market as well as increasing the intrinsic value of your whole brokerage organization; dramatically lowering expense through automation.
Why is Automation so Important for Insurance Brokers?
Automation efforts for insurers have been ongoing, yet the industry has experienced no noticeable improvement in productivity.
McKinsey makes an even more startling observation in “The productivity imperative in insurance” article from August 14, 2019. Here McKinsey compared the cost efficiency of insurance to other industries and shows that not only is insurance failing at creating efficiency, it is getting worse over time.
Insurance brokers account for the lion’s share of distribution expenses in the broker/agency distribution model.
Many in the insurance community have been quick to conclude commissions are the problem, hence direct-to-consumer alternatives. Truth is it is expensive to attract customers and insurance brokers offer tremendous value, especially to commercial customers than a D2C insurance product ever could.
The real problem is that insurance has failed to innovate and is missing huge opportunities by reducing expenses through automation. Much of that burden has fallen to insurance brokers. Now is the time to change that.
In fact, a recent article in Canadian Underwriter, “Commissions may not compensate brokers for rising workloads”, June 21, 2022 by David Gambrill makes the case for altering broker compensation.
It is not a compensation problem, it is a productivity and efficiency problem. The problem stems from the fractured nature of insurance distribution and lack of collaboration on sensible solutions between brokers and insurers.
Looking at the insurance distribution expense structure reveals a heavy overhead of compensation (for manual processes and back and forth communication).
P&C Distribution Expense by Function
The bigger picture is that both insurers and brokers have similar expense profiles and it highlights the priority of automation. Automation reduces manual tasks (which drive up compensation and reduces efficiency), freeing up valuable resources for customer acquisition and other customer facing activities and facilitates a better buying experience.
The Insurance Automation Paradox
Without doubt insurers are outpacing brokers in innovation for efficiency. However, their impacts have shown limited benefits in an independent broker distribution channel. Previously mentioned, workloads for brokers are increasing, not decreasing. A key reason is whenever an insurer pushes a new solution into the independent broker distribution channel, it must compete against other insurers ways of doing things (which are never the same).
Every insurer wants to differentiate themselves and bring in more business through the independent broker distribution channel. However, unless an independent broker wants to be a “captive” one insurer broker, they still must work with the soup to nuts of other insurer systems and work flows.
A Broker Efficiency Innovation Breakthrough
OK, so insurer efficiency innovations simply have not worked to reduce the inefficiency within the broker distribution channel. A real quick look at the [distribution] expense ratio shows that:
Brokers hold the key to efficiency innovation because they work with multiple insurers and own the customer buying experience. In broker distributed insurance the broker is the conduit and hence in the best position to affect real change through the vertical.
Insurers, in practice, have delegated underwriting authority to brokers in some form or other. However, until now, brokers have been left to be self-sufficient in how they managed that authority. Far too many spreadsheets and word-macro infused documents is first that comes to mind.
There are other tools available but both cost and complexity are intimidating for the actual benefit (hence spreadsheets and Word macros).
No More Macros or Spreadsheets
What brokers need more than anything are automated tools that reduce the friction of the distribution vertical and increase the efficiency of a multi-insurer distribution channel.
Brokerflo’s Platform has rewritten the insurance distribution experience. The goal is to give larger brokers the technology to drive efficiency and deliver remarkable customer experiences. At the core of the Brokerflo platform is a modern automated underwriting engine. Key features include:
- 100% automation of the entire policy lifecycle – quote, issue, change, remarket/renew – everything in Real-Time
- Multiple insurers. Quotes for new business and renewals through every available insurer on the platform with policy issuance and policy change through the selected insurer.
- Client based (as opposed to policy based) solution where a single simple application can be used for the client’s entire coverage needs, rather than chasing down multiple applications for different coverages.
- Brokerflo brings in available and custom API to pre-fill initial applications. This uses data analytics to calculate correct property valuations (ie. Commercial Building and Heavy Equipment) and to reduce error and work effort. Brokers can spend customer facing time on reviewing valuations and providing the right coverages on new business as well as renewals.
- Most modern commercial portals focus on small business. Brokerflo’s platform can deliver even the most complex insurance solutions in Real-Time. Schedules, multiple locations, subscription policies – NO PROBLEM.
- 100% bespoke commercial insurance solutions. No prefilled, canned pamphlet type policies or master policies. Every document produced by the Real-Time platform is bespoke including necessary endorsements and warranties.
- Brokerflo equips brokers with sophisticated risk management tools. By leveraging data analytics, the platform identifies potential risks, detects anomalies, and provides proactive risk mitigation strategies. Brokers can assess client risks accurately, recommend appropriate coverage, and deliver customized risk management plans. This proactive risk management approach benefits customers by reducing losses and ensuring long-term profitability.
The Brokerflo Platform was imagined from greenfield without legacy constraints. Built for an insurance customer buying experience facilitated through an independent broker.
So, what does this mean? Business placed through Brokerflo will see a boost of over 100% in profitability. If you are a larger broker that wants to increase your efficiency and maximize profit contact us.