As Brokers Merge; Pricing
With more broker
M&As comes more
depth. But there are
still pros and cons
to consolidation that
insureds should know.
By Alex Wright
The frenzy of wholesale brokerage consolidation continued at a rapid pace in 2017 and 2018, driven by a large capital surplus, advancements in technology and aging owners. Wholesalers are also coming under increasing pressure to merge by large retail brokers seeking to reduce their pool of intermediaries to
drive volume, increase commission and fee income and control premium flow.
There is also the need to keep up with the growing sophistication of
distribution systems and the appetites of hungry private-equity firms entering the
market. Added to that is the increasing consolidation of retail brokerages, meaning
fewer companies for wholesalers to do business with as the Big Three global
brokers continue to snap up more targets.
STEADY GROWTH IN M&AS
Last year alone was the highest in recorded history for U.S. insurance broker
mergers and acquisitions (M&A) at 536, as well as the largest number of deals closed
in the fourth quarter for six years, according to M&A advisory firm MarshBerry.
The top 10 acquirers accounted for 50 percent of announced deals in 2017,
with Acrisure, HUB International, BroadStreet Partners and Arthur J. Gallagher
comprising the top four.
Futhermore, consolidation in the specialty brokering space broadly mirrors
M&A among insurers, many of whom have been buying up specialty teams to
help manage their underwriting cycle in a low-rate environment.
But as companies are acquired or merge, new start-ups are springing up in their
place, often formed by previous owners who have sold up, adding to the competition.
David Bresnahan, executive vice president, Berkshire Hathaway Specialty
Insurance, said the current surge in wholesale brokerage consolation was the
result of profitable wholesaler business and retailer capital surplus. It also stems
from the larger retail brokers forcing smaller wholesalers to sell up by not doing
business with them, he said.
“Generally, their margins are much better than the underwriters and insurers
can generate; so, it’s an attractive and profitable business,” he said. “There also
continues to be a surplus of capital interested in owning and investing in insurance
brokers and encouraging growth and M&A.
“Third, the larger retail brokers are forcing many smaller wholesalers to sell if
they choose not to allow their firms to trade.”
But what does all this mean for the insurance buyer at the end of the insurance
BENEFITS OF CONSOLIDATION
One immediate advantage is that, as larger brokers take on the specialist
expertise of small wholesalers, they can scale up their operations, bringing specialty
capability to a wider market. David Blades, senior industry analyst, A.M. Best, said the
key benefit of brokerage consolidation for insureds is working with a company
with more efficiencies and economies of scale as part of a larger organization. It also
provides them with a greater knowledge base and product range, he said.
“From a buyer’s perspective, there may be fewer wholesalers to choose from, but
they have the advantage of being able to access stronger and better capitalized
organizations with more depth and the ability to move quickly in the market
place,” he said. “It also exposes them
to a greater expertise and geographical
and product reach.”
Robert Raber, associate director,
A.M. Best, said that despite the change,
buyers will still have access to the same
channels for placing their business. He
added that as long as there is demand
for E&S, there will always be well-
capitalized companies with a strong
financial rating willing to provide it.
“[The insurance buyer] may actually
pick up some gains as a result,” he said.
• More brokerages are
consolidating through mergers or
• These M&As bring a number of
benefits to insureds, including
• Premiums, however, may rise in
this era of consolidation.
“There may be fewer
wholesalers to choose from,
but they have the advantage
of being able to access
stronger and better capitalized
organizations with more depth.”
— David Blades, senior industry analyst, A.M. Best
Brokerages are on a consolidation tear. Will insureds see any benefits?