“The wise man must remember that while he is a descendant of the past, he is a parent of the future" (Herbert Spencer)
Throughout my already long career in the insurance industry, I have witnessed many interesting, challenging, and sometimes perplexing developments in the broking world. I have also heard many stories concerning the potential demise of the insurance broker, the disintermediation of the insurance transaction and even the death of the wholesaler.
Online trading, bank assurance, alternative risk transfer solutions and insurers dealing direct have all been named as potential risks to the brokerage activity with the ability to drive brokers out of business. However, and in spite of all prophecies of doom, insurance broking is alive and kicking and due to get livelier.
Online trading, bank assurance, alternative risk transfer solutions and insurers dealing direct have all been named as potential risks to the brokerage activity with the ability to drive brokers out of business. However, and in spite of all prophecies of doom, insurance broking is alive and kicking and due to get livelier.
The one constant in the insurance broking world is change. It is therefore prudent to continually reflect on the forces that are at work within our industry and to identify the new players that are shaping its future.
Trends and Challenges
When considering how the insurance broking industry has been evolving, Charles Darwin and Herbert Spencer, the famous 1800s’ naturalists, come to mind. These acclaimed scientists would probably acknowledge that the insurance broker has done nothing more than follow their evolutionary theory of ‘natural selection’.
They would probably agree that brokers’ behaviour in the recent years has continually proved their concept of ‘the survival of the fittest’, which has probably been the key for the longevity and resilience of this profession. Just like any other species, the insurance broker has struggled to adapt to the environment it is in. And it will continue to do so. The industry’s motto certainly seems to be: adapt or decline.
They would probably agree that brokers’ behaviour in the recent years has continually proved their concept of ‘the survival of the fittest’, which has probably been the key for the longevity and resilience of this profession. Just like any other species, the insurance broker has struggled to adapt to the environment it is in. And it will continue to do so. The industry’s motto certainly seems to be: adapt or decline.
If insurance brokers’ ability to keep evolving is beyond question, it is equally important to understand the trends and challenges that have driven this evolution.
Trend 1: Industry Consolidation, mainly by means of M&A strategies
"Big is beautiful”? As in other industries, this mantra also seems to have been a catalyst in the brokerage sector, starting in the 1990s and still active today.
This driving force has shaped important changes in the industry. Aon is certainly a great example of this trend. Under Pat Ryan’s leadership, it was no secret that the company aimed to be the biggest broker on the planet. Its name alone - Aon is the Irish word for number one– was a rather obvious hint of these ambitions.
But Aon was not alone in these aspirations, Marsh McLennan was also expanding. Both companies tried very hard to outdo each other by swallowing up the competition. Other brokers such as Willis and Jardine Lloyd Thompson (JLT) followed suit, as did a number of acquisition hungry US brokers. Names that were rich in history, culturally strong and synonymous with a golden age of insurance broking were consumed at an alarming rate.
Sedgwick, Alexander & Alexander, Bain Hogg, Jenner Fenton Slade, Johnson & Higgins, Acordia, CT Bowring, FS James, Benfield Group, Lloyd Thompson, Alexander Forbes, Corroon & Black, HSBC, Heath Lambert, and many more were victims of this merger & acquisition frenzy. Between July 1996 and 1997, five of the world’s top 20 brokers were swallowed up. This statistic is self-explanatory.
But Aon was not alone in these aspirations, Marsh McLennan was also expanding. Both companies tried very hard to outdo each other by swallowing up the competition. Other brokers such as Willis and Jardine Lloyd Thompson (JLT) followed suit, as did a number of acquisition hungry US brokers. Names that were rich in history, culturally strong and synonymous with a golden age of insurance broking were consumed at an alarming rate.
Sedgwick, Alexander & Alexander, Bain Hogg, Jenner Fenton Slade, Johnson & Higgins, Acordia, CT Bowring, FS James, Benfield Group, Lloyd Thompson, Alexander Forbes, Corroon & Black, HSBC, Heath Lambert, and many more were victims of this merger & acquisition frenzy. Between July 1996 and 1997, five of the world’s top 20 brokers were swallowed up. This statistic is self-explanatory.
These acquisitions had also international ramifications. Well-known local broking groups from Asia to Latin America, Canada and Australia also fell under the banner of the top four largest international brokers.
This trend towards market consolidation remains quite strong today. Consider for instance, the latest moves by AJ Gallagher. Although the company is well-known for having made multiple smaller acquisitions in the past, their M&A strategy clearly intensified in 2013/2014. During this period significantly larger acquisitions took place. Bollinger in the US, Noraxis in Canada, Westfarmers in Australia and the Oval and Giles entities in the UK were acquisitions of particular note.
In 2013 alone AJ Gallagher acquired $190M of new revenue through international expansion. This strategy meant the broker not only grew significantly in terms of size, but also expanded in geographical terms. In a sense, AJ Gallagher joined the big three (AON, Willis, Marsh), copying in many ways their operational models. A new player was born.
In 2013 alone AJ Gallagher acquired $190M of new revenue through international expansion. This strategy meant the broker not only grew significantly in terms of size, but also expanded in geographical terms. In a sense, AJ Gallagher joined the big three (AON, Willis, Marsh), copying in many ways their operational models. A new player was born.
Other new kids on the block also emerged such as Hub International. They were able to rapidly assume significant positions in the US and Canada markets, mainly by pursuing aggressive acquisition strategies.
Figures clearly confirm this trend: the revenue generated by the world’s 10 largest brokers increased from $20 billion in 2002 to $38.7 billion in 2014 – an unequivocal sign of market consolidation and of a major shift in the balance of power.
When considering rankings, the impact of this trend is even more evident:
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On the one hand, it is quite obvious that the top 10 brokers write an increasing amount of premiums leading to control of a larger proportion of revenue. On the other, it is crystal clear that they have become even larger throughout the years. Furthermore, instead of the traditional Big 3, extensive market shares are now controlled by the Big 4, if including AJ Gallagher, or even by the Big 5, if considering Jardine Lloyd Thompson.
Combined these evolutions reflect an unequivocal change in the overall market structure, with significant shifting of balances of power.
The overall consequences of this consolidation trend are greater shareholder value, critical mass and higher company valuations. More importantly, the main consequence for buyers is undoubtedly less choice. This is a major challenge facing the broking industry. As market players continue to merge and acquire to achieve critical mass, clients ultimately lose out as there are fewer options to choose from when appointing a new broker. Is this trend limiting customers’ choices in such a way that it practically means condemning them to work with the Big 3, 4 or 5 or are there significant alternatives?
Mega brokers would probably counter argue with their ability to use their premium muscle and size to get the best deal for their clients. Even if this argument might, on the face of it, seem to be valid, in practice it deserves a closer scrutiny especially at local office level.
Mega brokers would probably counter argue with their ability to use their premium muscle and size to get the best deal for their clients. Even if this argument might, on the face of it, seem to be valid, in practice it deserves a closer scrutiny especially at local office level.
Even insurers, who rely on brokers for their product distribution, are often heard lamenting the fact that the top 3 brokers in particular control too much of the world’s premium volumes.
During the 2014 Brokerslink annual conference held in in Venice, Mike McGavick, CEO of XL Caitlin, recognised as much. Brokers’ consolidation was clearly pinpointed as an important threat among the five main trends of the insurance landscape he identified. This may be one of the reasons why we have witnessed an increasing proximity between large underwriting groups and independent and niche brokers. These relationships are being nurtured by the underwriters to help to reduce their reliance on the larger brokers.
During the 2014 Brokerslink annual conference held in in Venice, Mike McGavick, CEO of XL Caitlin, recognised as much. Brokers’ consolidation was clearly pinpointed as an important threat among the five main trends of the insurance landscape he identified. This may be one of the reasons why we have witnessed an increasing proximity between large underwriting groups and independent and niche brokers. These relationships are being nurtured by the underwriters to help to reduce their reliance on the larger brokers.
Trend 2: Higher levels of integration
Higher levels of horizontal integration have also become increasingly common in the broking industry. Where once employee benefit consulting, risk engineering services, risk management and indeed underwriting were offered by different organisations, the concept of the ‘one stop shop’ is now firmly part of the evolutionary process. This means that brokers have been investing strongly in bringing together and deploying a wide range of skills sets, which allows them to provide clients with integrated and complementary solutions.
Again it can be questioned whether this approach is better for the client. While it is beyond dispute that this approach can provide economies of scale and scope for market players, when taking the clients’ side it can be argued that they would benefit from being offered a choice of independent specialist service providers, separate from the insurance purchasing transaction.
Reinsurance broking and employee benefits areas can provide interesting examples where independence can be an issue. It is difficult not to imagine potential conflicts of interests in the value chain where there is commonality of providers.
Reinsurance broking and employee benefits areas can provide interesting examples where independence can be an issue. It is difficult not to imagine potential conflicts of interests in the value chain where there is commonality of providers.
This trend also contributes to market consolidation as brokers become larger also by integrating other risk related activities.
Trend 3: Globalization
In a similar line of reasoning, globalization emerges yet again as a major trend in the brokerage industry. Its impact on market consolidation is clear.
Globalization has meant that insurance buying corporations have developed and expanded their own global operational footprint with many European, Latin American and Asian companies becoming multinationals in their own right.
As economies became more integrated and higher levels of interdependence became the norm, the needs and expectations of these companies also evolved. Insurance-wise, clients started to need to manage their insurance programmes over multi-jurisdictions and territories, and expected their insurance intermediary to be able to respond. In this context, the broking industry had to follow suit and extend its geographical reach. Yet again the need to adapt to trends and expectations fuelled brokers’ desires to be close to the action. ‘Think global-act local’, the glocal approach, and many other trite phrases became common.
As economies became more integrated and higher levels of interdependence became the norm, the needs and expectations of these companies also evolved. Insurance-wise, clients started to need to manage their insurance programmes over multi-jurisdictions and territories, and expected their insurance intermediary to be able to respond. In this context, the broking industry had to follow suit and extend its geographical reach. Yet again the need to adapt to trends and expectations fuelled brokers’ desires to be close to the action. ‘Think global-act local’, the glocal approach, and many other trite phrases became common.
This trend becomes self-evident when considering the proportion of some brokers’ revenues that comes from international markets. In some cases the percentage is absolutely staggering as portrayed in the table below:
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Trend 4: Emergence of new Insurance Hubs
One of the side effects of globalization and of the extended reach of insurers, brokers and insurance buyers is the emergence of new insurance hubs.
In Asia, for instance, Singapore has become a hub for insurance in the region and similarly Miami has taken a dominant position for Latin America. Brokers and underwriters are setting up operations in these hubs to not only ensure they gain access to the premiums emanating from these territories, but also to guarantee close proximity to their clients.
This underlying principle will continue to fuel the growth of broking investment in emerging markets.
This underlying principle will continue to fuel the growth of broking investment in emerging markets.
Furthermore, this trend poses yet another thought provoking challenge. Where previously London and the Lloyd’s market as an example used to enjoy a significant inflow of premiums from international markets, underwriters and brokers are now using these emerging hubs more and more. As the likes of Mexico, China, Brazil and India expand their market capabilities locally this trend will continue or indeed gain momentum. Is this the start of the end of the London wholesale market? Perhaps the London wholesale market also needs to consolidate to achieve growth targets?
This rationale may be behind the M&A trend that is sweeping London at the moment. Paradigmatic examples of this evolution are the recent purchase of Miller by Willis and the coming together of two large independent brokers: RK Harrison & Hyperion/ Howden group. This follows hot on the heels of Cooper Gay Swett
& Crawford purchase of NMB. As a consequence, choice for the ultimate buyer and also for retail brokers seeking specialist broking support in the London market seems to shrink once more.
But, interestingly, these transactions may have yet another consequence, which entails a shift in the balance of power and structure of the markets. Overseas retail brokers accessing wholesale support in London face a key decision concerning the choice of the partner to use. Recent changes have made this decision rather more complex. Some of the independent providers to whom brokers could resort may now be owned by competitors in their local markets. The best example is, perhaps, Miller Insurance in London and Willis. Does Willis ownership of Miller impact on partner selection decisions? Food for thought.
The drive for a global footprint can have a similar effect. Take JLT as a case in point which, in addition to buying operations in India and Turkey recently, launched a new operation in the USA. Would retail brokers in the US that currently place business into the JLT wholesale operations in London continue to do so, when JLT is now competing on their doorstep? It is interesting that JLT unlike Willis, has chosen the present moment to merge its wholesale arm Lloyd & partners back into the group under the JLT banner. This may be a riskier decision, particularly given the context.
Nevertheless, at present and in terms of direct commercial insurance premium, London is approximately 4 times bigger than Bermuda, 11 times bigger than Zurich and 15 times bigger than Singapore. In this context, London’s demise may not be such a pressing issue.
The brokerage industry is, without a doubt, living most interesting and dynamic times. New challenges for clients, insurers and brokers themselves will certainly emerge from the ever growing level of market consolidation, fuelled not only by a M&A frenzy, but also by globalization and the integration of risk related activities. The balance of power and the structure of the markets are changing requiring not only an acute awareness of the industry, but also continuous attention to new trends and players that may emerge.
Global Networks an Important Player
Broker networks are important players in insurance distribution in general, and in the brokerage industry in particular.
While M&A had a strong impact in the market, many broking companies were not ‘consumed’ by the larger predators. Even so, they still had to answer to the same market challenges and were left to find alternative solutions. Many opted for seeking out relationships with likeminded broking firms in cross border collaborative networks. Rather than trying to replicate the acquisitive nature of the larger brokers by owning entities in foreign jurisdictions, many sought to create or integrate partner networks.
As M&A continued to take their toll, the number of networks grew until there were so many that it became almost an industry in itself. WBN, Unison Brokers, Wells Fargo, Globex, Alinter, Uniba, Assurex, AESIS, Lockton, EOS Risk, and Brokerslink are good examples.
However, not all of them survived over the years. Some were either closed down or acquired. Recent casualties include WFGBN, EOS, E-QUA and AESIS.
But why join a network in the first place?
Most of the times, joining a network was seen as a defensive mechanism to counter the argument that many multinational insurance clients used when tendering their business – brokers’ inability to answer clients international needs and expectations simply because they were not directly present in the required territories.
This argument played firmly into the hands of the large global brokers, who in response also created their own self-labelled networks to try to demonstrate to their clients that they could offer service and distribution wherever their clients resided. If they could not get a foothold in a certain country, they asked local brokers to join their networks. In some instances these networks were managed by the smaller international or US brokers, with Lockton and Wells Fargo as obvious examples.
However, one of the flaws of networks owned or managed by large US brokers in particular is they are often more concerned with being able to service their US clients’ overseas operations rather than trying to grow insurance opportunities amongst the membership. This often creates cultural tension that does not encourage collaborative networking.
If large brokers’ own networks faced challenges, the same happened with many of those made of independent brokers. Although many brokers chose to join multiple networks with the goal of attracting as much in-coming revenue as possible from as many potential sources as possible, these same brokers seemed to lack incentive for actually using the network partners to handle their outward business. This passive mood was not conducive to long-term success and led to the demise of some networks.
These situations certainly portray inherent weaknesses in both approaches, meaning a less than adequate way to deliver the expectations of the ultimate insurance buyer.
So, are there any interesting alternatives?
The million dollar question is really one of knowing if there is a way of making these networks more successful and more resilient for the future. Or, going even further is there a different way of going about this? And is there a better way of serving clients’ global needs?
Let us consider a number of aspects of Global networks that can influence their effectiveness and their ability to respond to changing market dynamics.
Fees
Standard practice in the majority of networks entails charging a fee for membership. These fees help to administer the infrastructure, and are among the networks’ main sources of revenue. Even if not problematic in itself, this practice can generate some discomfort with members often questioning the fee levels especially if they are not seeing any inward premium income from this source. If a broker is also the member of more than one network the fee outlay can also become quite significant.
Even so, fees are not a real issue in their own right and do not contribute significantly to the inefficiencies inherent in the business model.
Membership
Different networks champion different approaches. While I advocate the strategy of appointing only one network representative per country, some networks opt for having several members in the same country, or even in the same city. In my view, this option may be divisive and can cause unnecessary conflict and confusion. The alternative model that I support involves selecting network partners wisely, and putting faith in the best available player in each country. This builds trust on both sides and ensures that the members are actively engaged in looking for opportunities to transact business across the network and international boundaries.
Ownership
This issue is, in my opinion, where most of the existing models fail. Frequently the ownership of the network is either vested in the global parent company or in the founding entity. The flaw in this approach is that it fails to fully align the interests of the members. If the owner of the network is only interested in ensuring that its members are there to service its needs, it is difficult for the network to build shared values and work collaboratively. Involvement and commitment will be hard to generate. It will also be extremely difficult to create a common vision, and bring together the efforts of all towards something that is barely seen as a common project.
The Alternative
These arguments combined with some of the shortcomings that can also be attributed to mega brokers, led to the belief that an alternative business model is possible. And to be truly different, the new model must not conform to the structural precepts of the mega global broker, nor of the classic broker network.
This new vision for insurance distribution is certainly what has been driving Brokerslink’s recent evolution. It is my firm belief that from this process a truly different organization will emerge.
In order to understand the present options, it is crucial to have in mind the path travelled so far.
Back in 2004, Brokerslink was created based on the premise that all its members should know each other well and have close relationships. Its progression also reflected the assumption that members shared a common desire to be successful in growing the network, and that they all craved to be able to compete with the best and win. Providing clients with access to talented insurance broking resources everywhere in the world was among the key goals.
Later it also became evident that our response to o clients’ needs could be taken to the next level if members were also able to offer them independent specialised risk services. This meant bringing in a diverse skill base of experts, which included captive management, engineering services, business continuity planning consultants, employee benefits consultants, cyber expertise and reinsurance to name but a few. While still providing clients with freedom of choice, this option gave them a reassurance that each of these resources had been selected and vetted for their ability to respond effectively to their needs.
At that point in time, and having in mind both the strengths and weaknesses of other networks and Brokerslink own legacy, it became self-evident that the time had come for evolving towards a different business model.
I contend that Brokerslink's new model encompasses a set of characteristics which overcomes the disadvantages of old world models and offers clients best-in-class solutions. Furthermore, it effectively transformed Brokerslink from a network to a global broking company.
Brokerslink has now become an equity-based company, incorporated in Switzerland.
In line with this new legal structure, Brokerslink no longer has members in the traditional sense. Instead, Brokerslink has partner companies, which may have an equity stake in the global organisation. Their ownership of the company fosters higher levels of alignment and commitment towards common goals.
Ultimately, Brokerslink’s success doubtlessly benefits all, and this is clearly perceived. Furthermore, this new ownership structure also assists in encouraging members to push business throughout the network and to seek collaborative opportunities globally. In this way, two of the main shortcomings of the traditional model of networks are addressed: the ownership issue and the lack of willingness towards channelling business to other network members.
Ultimately, Brokerslink’s success doubtlessly benefits all, and this is clearly perceived. Furthermore, this new ownership structure also assists in encouraging members to push business throughout the network and to seek collaborative opportunities globally. In this way, two of the main shortcomings of the traditional model of networks are addressed: the ownership issue and the lack of willingness towards channelling business to other network members.
Additionally, and in clear contrast with other existing models, Brokerslink is a profit-oriented company with an active and aggressive commercial stance in the market. Instead of merely servicing members’ clients, Brokerslink will have its own clients, its own portfolio. As a result, another paradigmatic change occurs with the main source of revenue no longer being connected with membership fees, or even sponsorship. Revenue is now generated from client management.
To avoid potential conflicts and confusion, our clients will be serviced in each territory by a carefully chosen broker who knows the local market intimately, its culture and practices, and its people. More importantly, this representative is far from being a mere office of a mega broker. It is a truly committed and entrepreneurial broker, who is willing to go the extra mile for our client.
Brokerslink’s operations are supported by a streamlined central structure, eliminating heavy, costly structures and enjoying the benefits of flexibility and efficiency put to the service of our clients.
And finally, all this comes together by means of a very strong common identity. These are exciting times. The fittest will always survive as will those who are willing to adapt to changing environmental drivers. I firmly believe that this approach will, in the long run, allow us to continue to develop, stay relevant and have a say however the market evolves.
By José Manuel Fonseca | CEO of MDS Group and Brokerslink
By José Manuel Fonseca | CEO of MDS Group and Brokerslink
1 First presented at the 3rd Asia Insurance Brokers’ Summit, in Kuala Lumpur, Malasia, on March 4th 2015.
