Brokers

Increasingly Tough Market for Brokers

A softening market and aggressive competition is making it more difficult for independent brokers.
By: | November 5, 2014

Brokers are facing an increasingly tough market, according to the latest best practices study by the Independent Insurance Agents & Brokers of America (IIABA).

The study, which the IIABA or Big “I” has been carrying out over the past 22 years, looked at the results of America’s top performing independent insurance agencies in six revenue categories, ranging from less than $1.25 million to more than $25 million.

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The study showed that growth is continuing, but has slowed across the board in all sectors – especially compared to last year, when the review found some of the highest growth rates since 2008.

Madelyn Flannagan, vice president of agent development, research and education at the organization, said the “challenging environment” is affecting all agents.

“The CL [commercial lines] P&C market has softened again and the economy in many parts of the country remains sluggish making it hard to achieve organic growth,” she said.

“While some expenses will be lower as revenue decreases … most operating expenses will remain fairly constant unless a concerted efforts is made to trim fat.” — Madelyn Flannagan, vice president of agent development, research and education, IIABA

Competitive Challenges

“New and different competitors entering the industry will always be a challenge, especially those with huge advertising budgets and the technology platforms to support their competitive edge.

“Independent agents have to be able to bridge that resource gap by offering significant value, which is harder to do for the more traditional, independent agencies. The world is changing rapidly but those that adapt are doing very well,” she said.

The IIABA study found that brokers earning less than $1.25 million saw increased net revenue organic growth of 4.6 percent in 2014, a decrease of 2.3 percent, from 6.9 percent in 2013. Similarly, agents in the $2.5 million to $5 million category saw 7.8 percent growth in 2014, which was a decrease of 1.7 percent, from 9.5 percent growth in 2013.

Brokers in the $10 million to $25 million category saw year-over-year slight growth, from 10.4 percent in 2013 to 10.8 percent in 2014.

“The independent brokerage market is being affected by several factors,” said Jeffrey Rieder, partner at Ward Group, which provides benchmarking and best practices studies for insurance companies.

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“Price increases have slowed down and the rate of growth itself has slowed — brokers have been seeing price increases of 3 to 4 percent, where they’d previously seen 5 to 6 percent or more in some sectors.

“There’s also been a lot of mergers and acquisitions activity and this has led to a lot of consolidation that has seen the core force [of brokers] dwindling.

“The low interest rate environment has also had an impact, with much more focus on underwriting profits, as opposed to 15 to 20 years ago, when there was an emphasis on cash flow to be used for investment purposes.” — Jeffrey Rieder, partner, Ward Group

“The consolidation,” he said, “has been driven by the retirement of agency principals, agencies trying to maximize contingent commission payments and also trying to achieve economies of scale in the back offices.

“The low interest rate environment has also had an impact, with much more focus on underwriting profits, as opposed to 15 to 20 years ago, when there was an emphasis on cash flow to be used for investment purposes.

“While the cost of reinsurance is more affordable at the moment, many companies are able to keep more of the risks on their books due to very strong surplus positions,” he said.

Profits Under Pressure

The IIABA study found that as revenue growth rates slowed, pro forma profit margins were — and are expected to continue to be — under increased pressure. There will likely be either no growth or negative growth in the coming year, it said.

Operating profit margins (pre-tax profit excluding contingent, bonus and investment income) grew slightly.

Those in the $2.5 million to $5 million category saw an increase of 12.8 percent in 2014, compared to 10.4 percent in 2013. Those in the $10 million to $25 million category saw a 7.6 percent increase in 2014, compared to 5.9 percent the prior year.

Brokers in the lowest category — earning less than $1.25 million — saw a slight drop in operating profit margins, from 17.4 percent in 2013 to 17.3 percent in 2014.

The Big “I” noted that, over the past decade, previously significant contributors to profit margins — revenue from P&C contingent and life-health bonus income — has shrunk.

Those brokers deemed by the group to be Best Practices Agencies (BPA) have “focused on becoming less dependent on such income by reducing expenses, becoming more efficient and finding other sources of revenue. As a result, the operating profits continued to improve,” according to the IIABA.

BPAs are so designated due to their “outstanding management and financial achievement,” according to the organization

Flannagan said the apparent stagnation of pro-forma profit margins “is simple math.” When revenue growth slows due to a soft market and falling rates, she said, profit margins stagnate.

“While some expenses will be lower as revenue decreases (e.g., producer compensation because they are paid a percentage of the premium), most operating expenses will remain fairly constant unless a concerted efforts is made to trim fat,” Flannagan said.

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“However, pro-forma margins remained fairly strong through much of this year even as organic growth has fallen because of contingency income,” she said. “It was very strong last year.  Most contingent payments for last year’s performance are made within this calendar year. As a result profit margins for this year are still pretty good, if not growing.”

Flannagan said agencies are also being challenged by retirements and recruiting challenges.

Talent Challenges

“We’re also looking at changes to the talent force in the future,” she said.

“At the moment, there are a large population of older insurance professionals — the average age is around 46, with between 10 and 11 years of tenure. The number of employees over the age of 60 has doubled — it’s the equivalent of the baby boom.

“At some point, they’ll have to be replaced, and we’ll see a lot of demand for talent as a result.

“The need to bring in adequate numbers of new producers and do those things that will help them succeed is perhaps the most critical issue facing independent agents today,” Flannagan said. “We as an industry are not doing nearly enough to ensure the system’s future vitality.”

Marc Jones is a freelance writer based in London. He can be reached at [email protected]

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