How to select an appropriate general insurance broker: Part 2 – is bigger better?

Mergers and acquisitions (M&A) continue across intermediated general insurance providers. In this article we look at the drivers of M&A and the extent to which that impacts the “policyholder”. We otherwise consider, following our article How to select an appropriate general insurance broker, whether size should matter to policyholders when they consider who best represents them in the insurance market.

Recent M&A trending has its genesis in the Financial Services Reforms of the early 2000s. A higher level of governance and compliance by the regulator required intermediaries to have more accountability. The reforms focused on licensing, reporting, governance, training and education (of employees and key persons). They also brought on broader liability for poor advice and otherwise greater sanctions for those not acting appropriately when carrying on a business.  One major trend that we observe though, is the emergence of “mega cluster groups”. The focus initially was back-office compliance, which moved to administration, governance, insurer product benefits and now has evolved to everything including significant equity positions in corporate authorised representatives. Today, Steadfast alone has a 30 per cent share of the $33.8B in gross written premium placed into the Australian insurance market.

We would also say a driver of M&A activity is the state of the insurance market itself. Throughout hardening and softening markets there are various opportunities for intermediaries who hold collectively more premium across a product or segment. This may yield greater benefits for policyholders represented by those ‘brokers’ including broader cover placed competitively. There may also be opportunities for intermediaries to earn greater commission to transact certain classes of business.

Some intermediaries have moved to become “sellers” and “distributors” of insurer’s products or across specialist industry segments. Risk that fits within these segments or product classes may be lucratively transacted as between intermediary and insurer. Where a broker exclusively works to distribute an insurer’s product and is incentivised by that insurer and the client: for whom does the broker act? Many policyholders may have transitioned from a boutique provider to a major cluster group or larger firm under such an arrangement. To what extent is there a better deal, however, outside such an arrangement? To what extent is their risk differentiated across others in the portfolio they have landed?

Again, larger intermediaries and cluster groups, have sought to increase distribution by obtaining delegated authorities to transact this style of business, and via related entities, distributed their product to the broader intermediated insurance market. Under an “agency model” there are further incentives for intermediaries such as bulking, side-car and profit commissions. Insurers are inclined to offer such incentives as their cost to transact drops significantly: particularly “people” costs. There have been lucrative “deals” for intermediaries who have been able to use technology to further minimise overhead and transaction costs.

Over the last 5 years international firms have been involved in M&A. By way of example the Marsh / JLT merger stands out as the most significant to complete, whilst AON / Willis the most significant to fail following a regulatory impasse in the USA. In 2022 there was the major acquisition by Ardonagh Group of Ed Broking, Besso and PIIQ Risk Partners. There are many significant transactions that we understand continue to unfold in 2023.

Most M&A is driven fundamentally by return to major private equity or investors. As a consequence, we observe “organisational efficiencies” to dictate future operations. In-turn there is less personalised service as a result of “people restructuring”. There has been significant movement of staff from existing international firms to the newly Australian established international firms. Two major problems emerge here. First, while the intent of the new entity may be to broaden and change service offerings – the reality is that policyholders are delivered the same service, simply under a different letterhead. It is business as usual, save for the inconvenience of signing a new letter of appointment. Secondly, there is a shortage of labour which in-turn puts pressure on recruitment and induction cost.

When selecting professional services consultants and advisers, there is an unwritten maxim that there is no risk in retaining a large global conglomerate for any outsourced work. This applies to insurance broking equally as it does to accounting, auditing and legal services amongst others. We are starting to see that perhaps this maxim no longer rings true. Business is now focusing on expertise, experience, servicing and value-added benefits.

The major trends therefore that we observe is that via M&A there has been significant movement of staff. The greatest impact has been felt by medium to large sized business. They have suffered from more transactional “insurance broking” services. There is less expertise across the industry as the demands of large corporate placements increase. More transactional business is moving to technology platforms. Those platforms cannot differentiate risk. Where a business is not a major corporate or fits within the auspices of a transactional system, are they being properly representative, or simply are they being placed in a square box?

Some common assertions
Large international firms say For policyholders’ consideration
They have better leverage because of the premium volume that they place into the insurance market: on that basis they assert that they can procure more cost-effective cover and get claims paid more efficiently

Mega cluster groups collectively place premium that outweigh the internationals. Specialists may have more premium across a specific industry or profession. Insurers may look more favourably on premium volume on a segment (IE industry, profession or product) rather than an entire portfolio. Specialist may have access to other intermediaries that operate in overseas markets, segments, or across products that larger intermediaries cannot access. By way of example, an international broking firm may only be permitted to use their related overseas company.

They have greater resources including expertise and experience. Businesses are not the same, therefore a  one size fits all approach is not appropriate. A business’ servicing needs vary based on the changes it experiences. It is difficult for insurers to create (and brokers to distribute) a one size fits all approach to arranging, managing and advising on risk. Understanding risk and offering relevant advice is becoming far more technical. As such, arguments regarding technology and upscaling of broking efficiencies to reduce transactional insurance costs may be sound for some policyholders but not for most.
Risk transfer: the larger company will protect me.

Many of the larger firms have onerous limitation of liability clauses. In most instances a risk advisor would be recommending that you did not accept these clauses. They include caps on liability for what would be loss arising from standard errors or omissions of the intermediary. Ordinarily an indemnity for loss caused by such errors or omissions would be available to the wronged party (at law and in a standard retainer). Many large firms acting under binder agreements expressly act on behalf of insurers. There is less protection for a policyholder who intends for their representative to be their agent: not the insurers.

Is bigger better?
We say “no”, bigger is not always better. The challenge we put to those considering the issue is to answer the following questions:
  1. How does being “big” make for a better client experience?

  2. Do you get a better experience dealing with a large, international firm, or are you better served by a firm which operates to provide advisory services to businesses of your size?

  3. What value does a large firm place on your business?

  4. Is a specialist risk advisor likely to provide a consistent service team over the long term?

  5. In a fast paced, changing risk landscape does size really give the advantage it once did?

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