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  • Writer's pictureChris Burand

The Silent Battle Between Agencies and Companies

P&C insurance companies are scared. Not all are scared, of course. Some are big enough, some are smart enough, and others are ignorant enough to not be scared about the future of insurance distribution. The ones that are scared are scared because of scale.

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So many agency acquisitions have been made by so few buyers that certain buyers are now larger than most carriers. For example, based on year-end 2017 10k's, Aon has almost $10 billion in revenue. Brown & Brown has $1.9 billion, Willis has $8.2 billion, Gallagher has $6.2 billion, and Marsh (before their huge acquisition of JLT) had $14 billion. According to an October 2018 press release from Hub, they have $2 billion in revenue.

According to A.M. Best, around 900 P&C carrier groups exist (many thousand insurance companies exist, but the 900 only includes the main company). Some years that number is a little lower and some years that number is a little higher. The 10th largest carrier on an NWP basis as of year-end 2017 is AIG with $14.2 billion. Marsh is larger now than 890 of 900 carriers. Of course, a large part of their revenue comes from outside the U.S. and I'm only citing U.S. carriers so this is not an apples-to-apples comparison, but the context provides an understanding of why carriers are so nervous.

Consider $2 billion for Hub and Brown and Brown. $2 billion is obviously much less than $14 billion, but nothing to snub. Only 43 P&C carriers, out of 900, have $2 billion or more in NWP. If direct writers are removed and reinsurers, the number of independent agency companies with more than $2 billion decreases to around 33 (it depends on how some of these companies' distribution methods are counted). Only 71 of the 900 carriers have more than $1 billion in NWP so the next tier of serial acquirers, almost all of which are private equity based, are larger than around 800 of the 900 carriers.

These numbers do not address some of the clusters either. If the top clusters' NWP is added to this list, several would be identified as too large for carriers' comfort.

When the distributors are larger than the product providers, the insurance companies they represent, the tail starts wagging the dog. For 150 years, the carriers have controlled the market. Ten years or so ago, the brokers and others were investigated for trying to control the market and doing so possibly in a nefarious manner. Some can control their market now without resorting to those practices which is a further cause for concern. Many carriers have no idea how to manage distributor relationships where they are not the big dog.

They also do not know how to control for adverse selection in this situation. They are desperately hoping, I suspect, that predictive modeling will eliminate the need for this concern, but I think every industry veteran knows predictive modeling is not a total solution in this situation. Humans can be quite creative when placing business when they want to be.

Another factor creating fear is the rise of legitimate captives for the best accounts and classes of business. Some companies pick up some of this premium on the reinsurance side, but they still lose on the primary market.

One of their fears is that through captives or other carrier related entities, these brokers will begin moving the best business. They fear the pressure these entities are bringing to pay them more money, regardless of the results achieved.

The companies' solutions? They are going to buy other companies and consolidate. It is interesting most acquisitions have been of surplus lines markets so far. By my calculations, using A.M. Best data, 11 companies have 50% of market share and 90 companies possess almost 88% of the market share (by NWP). That means that on an individual basis, the other 810 companies are mostly irrelevant. Those companies are even more scared of the changing distribution mechanics. All these companies are smaller than even the second tier of serial buyers. Not only do they have relatively little NWP, but many have little surplus (in absolute terms, not necessarily in relation to their premium), probably little ability to raise capital, and often a minimal ability to remain competitive.

Many need to sell and for others, they need to buy so they remain relevant (unless they can figure out how to grow organically quickly like Progressive, Berkshire, and USAA). Buyers needing to buy and sellers needing to sell almost certainly will result in consolidation.

Another solution for these carriers is to emphasize to their agents the importance of service centers. Service centers provide another center of control. Some companies think that if they control enough renewals directly, they will not face the pressures of consolidation. Another reason is the pricing flexibility created. An additional reason, although everyone denies it, is the possibility the service center will be a segue to taking over ownership of the accounts.

The battle from the agents' perspective is to get big enough to thwart the carriers' growth. It is like an arms race. So they sell or join clusters. The carriers in turn are buying stakes in InsureTech independent agencies. Their thought, I think, is that their growth rates with serial acquirers and clusters are generally awful (with some notable exceptions). This makes sense. If an agency cannot grow on its own, it probably needs protecting. Take 10 agencies that cannot grow on their own and put them in the same organization and what changes to create growth? Nothing. In fact, growth might be suppressed by the pressure to cut costs.

The InsureTech independent agencies may create the opportunity to offset the size issue and provide extraordinary growth to carriers. At the very least, many carriers, especially the large ones, are clearly willing to gamble on this bet given the 100 or so InsureTech independent agencies in which they've invested.

The problem with a race for size is losing focus on the customer. Like two armies battling, pray for the civilians caught between their lines. I know everyone talks about customer focus, but in this battle, true evidence has been hard for me to see. On the actual ground, I see so many producers and staff that do not even know basic coverages, the foundation of any customer focus. I do not see "customer first" being reality. When I have seen the policies of some of the new carriers and agents being lauded for their customer focus, I see sloppy short cuts that might leave policyholders hanging. 

Smaller players, at the carrier and agency/broker level are therefore being presented with an opportunity to choose true quality customer focused benefits since everyone else is ignoring this part. Much more than lip service is required because true customer facing focus, including knowing coverages, is hard work. But the competition is less and much less capital is required. Plus, for those that care, providing real solutions and quality coverage is meaningful. Smaller players can’t win the arms race but they can win customers hearts. What is your solution?


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.

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