Carriers' Growth

Carriers have a growth problem, and they only have one likely solution to generate organic growth.

A recent research paper, “Valuation and Long-Term Growth Expectations,” by Angel Tengulov of the University of Kansas, Josef Zechner of the Vienna University of Economics and Business, and Jeffrey Zweibel of Stanford University, identified key variables in determining long-term growth. In other words, what factors best predict long-term growth?

A factor that improves long-term growth prospects is a high barrier to entry. In the insurance industry, the barriers to entry are tiny, virtually insignificant, at the carrier and broker level.

The second factor is that the more debt a firm has, the more likely its long-term growth will be subdued. Carriers should ask themselves this question: “What percentage of our agents and brokers are highly leveraged?” Most of the PE buyout firms are highly leveraged. This is especially true, maybe even for a publicly traded broker or two, if important real-world adjustments are made rather than relying on GAAP accounting rules. If a company’s primary production engine is highly leveraged, it should not expect those brokers to grow very fast. In fact, we know this is true.

Third, firm size and age affect growth. The larger and older the firm, the slower it grows. With concentration among brokers so high, growth will be slow.

The primary production source for carriers is large brokers, with lots of debt, in an industry with virtually no material barriers to entry.

We can test this using the publicly traded brokers’ results, which show their organic growth rate trails industry growth. Based on the research and these results, any carrier CEO whose strategic plan depends on large and leveraged entities for growth should be fired.

The exact data on why these firms cannot grow is best detailed in another article, but reading the publicly traded brokers’ 10-K’s provides good clues. And I suggest the publicly traded brokers are likely in better shape than many of the PE-backed firms, so the 10-K’s are the baseline.

The situation is likely to worsen based on Fitch Ratings’ latest report showing that brokers are now pursuing larger acquisitions. This means more debt, more cumbersome integration, and somehow convincing themselves first and the market second that while the selling broker likely made a lot of acquisitions that did not generate organic growth, that when integrated into their firm over the next three years, organic growth will suddenly happen.

The same Fitch Ratings report shows broker growth is barely keeping up with GDP growth, further proof they cannot grow at the industry’s pace (premiums almost always grow faster than GDP).

In general, we know the brokers’ client retention and quality employee retention are both worse than average. We know their debt loads restrict their ability to invest in organic growth or attract and retain high-quality people. They can tout AI all they want, but that is not the reason for the layoffs. AI has arrived at the right time to provide cover for the layoffs they’ve needed to make for some time.

The solution for carriers is simple. They will need to buy other companies to camouflage their inability to grow organically, or they need to appoint different agents. The first solution will happen for many reasons, including how poorly capitalized many carriers are. Those carriers have no meaningful solution, especially if 60%+ of their agents/brokers are large, leveraged, and old. Those carriers will sell.

To generate organic growth, though, carriers must enter the Wayback Machine. Thirty years or so ago, carriers must have all gone to the same large consulting firm’s conference, where the message from on high was that carriers gained no benefit from appointing new agencies. Pretty much all carriers adopted that strategy, and it was another stupid strategy.

The result was the origination of networks. Carriers agreed to de facto appoint every agency in the network and pay them more than they would have paid them had they appointed the agency directly! I was recently working on a project where this was crystal clear. The carriers are paying about two full percentage points more because of the network than they would pay without the network and they are gaining no net value.

Carriers should never have abandoned helping new agents get started. Many new agents have little leverage and are far more desperate to grow than any other distributor. Does this mean carriers must actually work on the due diligence of what agents to appoint? Absolutely! Most no longer know how to do this, which will require retraining.

A carrier client recently instituted a program I helped develop that is revolutionary and will generate huge rewards for agents of every size and age, while generating alpha ROI for the carrier. However, that carrier had to agree to a more effective evaluation system for distributors. I applaud them for having the courage and being willing to do the hard work.

By appointing new distributors, carriers can break the power some distributors have over them (and some carriers’ distribution is so concentrated, they are down to less than 10 distributors that matter) over time. They can align with distributors possessing the characteristics more closely aligned with growth. They can pay them less. And the price is hard work and courage.

Those are the only options. Giving an old, slow broker great products is not the solution because they cannot use those tools effectively. Great tools are only useful to companies that know how to use them and have a significant incentive to use them.

Another option is to focus on the remaining independent agencies with no debt who have proven they know how to develop producers successfully. There are not that many left, but these agencies can be fantastic solutions, which likely deserve extra attention and maybe extra money.

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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.

None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.