Growth in the specialty insurance space continues at a fiery pace, with specialty premiums going from approximately 8% of the Property & casualty (P&C) marketplace about ten years ago to an estimated 18% in 2022. A significant amount of this market share capture has occurred in the last four years, which aligns with the hardening market that emerged in early 2019 in the Excess & Surplus (E&S) lines and largely continues today.
Larger brokers are capturing a significant chunk of growth in the specialty insurance distribution. These firms have retail and specialty divisions that house programs, managing general agents (MGAs), managing general underwriters (MGUs), general binding facilities, and a strong team of wholesale brokerage professionals. More forward-thinking firms are venturing into alternative risk solutions such as captive managers. It is exactly this type of specialty rollup strategy that has fueled the elevated M&A activity in the delegated authority segment and has caused comparably sized well-run specialty firms to be valued at a premium vs. their retail broker counterparts. As these more aggressive brokers continue to acquire specialty distributors, they are experiencing meaningful organic growth (in part due to the firm rate environment) and synergies with their retail brokerage affiliates.
While not all brokers have the scale and M&A prowess to execute this type of M&A strategy as part of their core business – firms of all sizes have control over key operational levers to drive growth.
Strength in the E&S Sector Continues in 2023
Premiums in the Excess & Surplus (E&S) sector are likely to continue their upward trajectory with a projected hike of about 10-15% in 2023. This follows the impressive growth of over 25% in both 2021 and 2022. A major catalyst behind this growth is the property market, especially the catastrophe-exposed segment. This segment will experience unprecedentedly high rate increases due to an elongated historically poor return on underwriting capital, which hit a challenging high point (or low point depending on your perspective) during the January 2023 reinsurance renewal period. These poor underwriting results are amplified as carriers are not able to offset lackluster underwriting results with acceptable investment returns. Both the historically low interest rate environment (which existed until early 2022 and still plagues much of carrier investment portfolios) and declines in the equity markets are providing no relief around acceptable returns on equity.
Time will tell if January was a true high-water mark for the property CAT segment, or merely just a step to more pain in the years to come. While CAT-prone season is still months away, early indications are that capacity is trickling back into the market. Most notably some of this capital is flowing at the insurance-linked securities (ILS) level, which was largely absent (along with London, although to a lesser degree) during the 1.1.23 renewals. If nothing else, the extremely hard market will separate the cream from the milk, as the best-in-class underwriters/delegated authority firms will rise to the top (and retain/grow capacity) as the weaker underwriting results of competitors result in diminished capacity, if not a total loss. The top performing firms may find themselves in a unique growth position in the years to come given a potential reduction of competitors and what is likely to be a favorable rate environment for the foreseeable future. However, all of this is only possible after pricing adjusts.
Additionally, it’s important to note that insurance capacity in the admitted space continues to be hard to find in states like Florida and California for certain lines of business. As a result, brokers are looking to the E&S market to fill these gaps. This too will continue to push premium growth in the specialty sector.
Large Brokers Look to Capture More Revenue and Faster Growth With Specialty Firm Acquisitions
Large brokers are strategically acquiring specialty firms with their attractive operating structures that can be effectively leveraged for growth. Utilizing the expert guidance of insurance M&A advisory services, these large brokers are assessing potential acquisitions more accurately. By collaborating with specialty distributors with niche focuses, large brokers are successfully capturing more revenue by funneling premium concentrations to the wholesale brokers or delegated authority affiliates (i.e., Managing General Agents or MGAs). This often results in more clout with carrier partners, optimal commission structures, enhanced profit shares and contingent arrangements, and/or the creation of proprietary products. Another benefit is controlling more of the client’s (the insured in this case) experience and therefore being less susceptible to retention issues.
How Can Smaller Brokers Continue to Compete?
While not all brokers will have the same level of resources as the largest firms that have an M&A strategy as part of their growth plans, there are steps that smaller brokers can take to maximize their organic growth, which will be paramount to remain competitive in this environment. Here are some strategies that firms of all sizes should consider:
- Look to expand distribution channels.
- Commit to an aggressive talent reinvestment plan, that includes hiring and promoting colleagues internally.
- Reassess your capital structure to build capacity and liquidity for growth.
- Re-think your risk tolerance as it relates to debt and leverage.
- Find leadership that can clearly articulate the vision of the agency/brokerage.
- Build a meaningful client value proposition that is most likely supported by technology, which translates into higher quality experiences.
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