Carrier Size vs Broker/Aggregator Size


I wrote an article in a prior newsletter regarding the relative size of many independent brokers and aggregators now being larger than most insurance companies (P&C). I focused on what strategies carriers are using to counter the weight of their distributors. Keep in mind that throughout the U.S. insurance history, the carriers were far larger than the independent agency distributors. The carriers' business models are largely built on the presumption they have the most power in this relationship. But now, this power alignment has changed dramatically with several distributors being far larger than the majority of carriers.

And they are flexing their muscle, which endangers the carriers' business models. While not official or public, I think it is widely known they have successfully pushed carriers to be paid more for average results. In other words, they are paid more because they are bigger, not better. If the carriers were not facing a significant shrinkage of insurance premiums due to the insured world becoming so much safer (keep in mind that many of the catastrophic weather related issues are not insured, either due to exclusions, due to governments providing coverage for those events, or because the losses are in third-world countries where property insurance is not a material risk management tool). Estimates are consistently in the 20%-30% range for how much premium will be lost in the next five-ten years. Of course, some premiums will be recovered and maybe cyber sales will eventually become material, but shrinkage is still likely.

When an industry shrinks, profits are constrained putting tremendous pressure on expense containment and creating a priority on organic growth. One strategy, probably the most common in these environments, is massive consolidation which enables firms to put the cost of growth on the balance sheet rather than the income statement preserving, at least on paper, adequate profit margins while eliminating competition and enabling the buyers to charge consumers more. But this does not always happen if the distributors are materially larger than the suppliers.

Some comments I received suggest readers took these facts to mean they have to get much bigger. I understand this point but the math probably does not work at this stage. To play the volume game, an agency probably has to be at around $100 million in revenue as a distributor. Understand that carriers have enough volume today.

They honestly do not need more volume (the 500 smallest ones do but most do not have the capital, or access to capital, to handle the volume they need to become relevant in this sphere). Let's use a $1 billion carrier with an average balance sheet. They have plenty of surplus, on average, because the industry has a surplus of surplus. A distributor then going from $5 million to $100 million through M&A is not important because the carriers already have all that volume.

Carriers need organic growth. Growth is a percentage. They need X% growth REGARDLESS of how much volume they have. An agency of decent size that is growing well organically has considerably more value to carriers than a large agency that is not growing. This is especially true if that large distributor has negotiated extra compensation. In fact, the more volume a stagnate, large distributor has, especially if they are being paid more than normal, the greater the drag that distributor is to their carriers’ income statements. The income statements show the expense and not much value. The carriers desperately want to get out from under this weight.

On the other hand, a $1 million revenue agency growing 10% brings considerable value. If agency owners and managers can understand they can't win the volume battle but they can win the growth war, life will be much easier. Maybe it is because this industry has always struggled to reward quality (i.e., the worst producers are paid 10 to 25 full percentage points more than the best producers relative to their books and companies pay large distributors that know how to negotiate more, even if their results are marginal). Very few companies nor agencies know how to best address a solution that is winning for both parties or maybe it is because companies are handcuffed to reward mediocrity.

I strongly recommend agencies focus on organic growth rather than volume because with adequate growth, you will achieve volume. Large, stagnate books just make growth more difficult.

Another set of inquiries following my prior article involved how insurance companies are now owning so many of the InsurTech independent agencies. This is an interesting development because many of these agencies are owned by multiple carriers. The carriers are willing to partner with other carriers to compete with their own agencies and potentially cannibalize their own sales in order to gain control, insight, lower costs, organic growth, and potentially equity gains when these agencies are sold to private equity or even eventually do an IPO.

The changes technology is bringing to the developed world, making it much safer, is quickly forcing change on this industry. Consolidation at the carrier level is obvious, especially considering how the alternative capital part of the industry continues to grow and likely capture the better quality accounts in many/most commercial lines. Carriers are going to work hard to recover their power over distributors, one way or the other including finding alternative distribution means if they must. They cannot afford distributors that cannot generate organic growth but demand extra compensation forever.

Agencies that can sell, truly sell, are what companies need and the smartest companies, forget the not-so-smart companies, will recognize and reward those agencies. They likely will only adequately reward them though if the agencies know how to negotiate better and get rid of the idea they have to be huge to negotiate successfully.

For assistance with improving your carrier negotiations, contact me at I have an excellent program for developing effective agency/carrier negotiations.

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.