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  • Hayden Kopser

M&A As Carrier Profitability Killer & Long Term Concerns in the HNW Space

The current model of brokerage commission payouts by HNW P&C Carriers, and some in the middle market, has begun to cause a long-term problem particularly as a majority of retail brokerage owners near retirement age en masse and many will choose and have chosen to sell their established books.

Carriers are unintentionally creating a profitability pincer by paying out high commissions and annual profit shares, largely to national and regional brokerages, and lower commissions + minimal or non-existent profit sharing to smaller retail offices.

The lower commission rates paid to smaller retailers (either directly or through wholesalers/programs) make them extremely appetizing acquisition targets for larger brokerages who can buy a book for ~3x current revenue, then quickly roll that existing business into their higher commission tier (often a 15% or greater increase on certain LOB in my experience). This makes acquisitions more affordable, while reducing carrier profitability (they now pay out more for the same business they already owned).

When this occurs, not only are Carriers less profitable on business they already owned (and may have been minimally profitable on), but they also now have less leverage with which they can reduce commissions or take any other adverse action that might increasingly larger brokerage partners.

While this highly successful book roll method of inorganic growth is nothing new in the P&C brokerage space, it will continue to impact carrier profitability, as the brokerages selling their books are unlikely to be replaced at the same rate acquisitions are occurring.

This will impact clients (and already has to North Improvement's benefit) because larger brokerages, with high internal expenses (despite high commissions rates) often look at ways to cut costs, which tend to focus on reducing the servicing of accounts ("think of how much we'd save if we didn't look at x% of renewals!" or so the logic goes).

Clients of the acquired brokerage may be able to access their same carrier, but without the same trusted broker they had grown accustomed to. This can lead to inadequate coverage placements, disappointment with service, and many other negatives that come with less human interaction. Though this may not have a large immediate impact, in the long run it may wrongly convince a reasonable percentage of clients that the HNW space is not worth the price of premiums.

For clients that prefer a boutique feel, finding a retail brokerage with direct HNW carrier access in the future (and the Underwriter relationship and leverage that comes with this) will grow more challenging. Future retailers may be able to obtain HNW access through wholesalers, but that is not an ideal way to place a large portion of a retailer's book, nor is it best for clients who want things handled promptly. This will again risk reducing client satisfaction with the HNW insurance experience regardless of how well the coverage they have suits their needs and lifestyle.

So, what might be some solutions to implement before this problem grows, perhaps irreversibly?

1) Carriers must make it easier for knowledgeable retailers (both new and established) to obtain direct access to their offerings and not through a subsidiary 'Access' brokerage or wholesaler

2) Carriers should invest in onboarding and supporting smaller retail partners (new and old), particularly those that are tech savvy and better able to win and service business of future generations of HNW clients. This may take some time to prove profitable, but the technology abilities of most larger brokerages are antiquated and will prove to be a barrier for keeping younger clients happy

3) Carriers could slightly raise commissions for smaller established retailers and slightly reduce those of larger brokerages who are conducting most of the acquisitions taking place. This will help extend the time it takes older brokerage owners to sell (less quick profitability for buyers will make them slower to put big multiples down). It will also make retail brokerage owners better off financially, which can help them justify staying in business longer or incentivize younger employees to take over their theoretically more profitable operation

4) Carriers should increase the expectations for organic growth required to allow for profit sharing by large brokerages. This, coupled with or exclusive of adjustments to commissions, will incentivize the need for big brokerages to grow organically rather than through acquisition

While the above is a non-exhaustive list of the problems facing the HNW market along with their potential solutions, I believe it is worth the consideration of HNW carriers who are seeking long term profitability therefore long term stability in our industry.


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