Following a robust 2023, the specialty insurance distribution segment continues to see rapid premium growth. MarshBerry defines specialty firms as those with delegated authority or act as intermediaries between that of retail brokers and risk-taking markets. Drivers of this expansion include the current elongated hardening cycle (5+ years long), movement of premium from admitted to the Excess and Surplus (E&S) markets, and product developments (such as Cyber and Cannabis).
Additionally, while carriers are beginning to experience improved profitability from investment portfolios, the Property and Casualty (P&C) industry saw its highest underwriting loss in 10 years in 2023, helping to fuel more premium flow into the specialty space.
MarshBerry estimates specialty distributors accounted for about $180 billion of premium written in 2023. Specialty premium as a percentage of the overall P&C market nearly doubled over the last decade, increasing from approximately 9.5% in 2013 to an estimated 19% in 2023. This trend is expected to continue.
Despite this ongoing growth, there are four major pressures that may impact the future of specialty distribution.
Private capital firms have high expectations for future growth
The specialty insurance distribution market has been a major area of interest for private capital firms. Private equity companies have recognized the significant growth opportunities, general stability of revenue, and superior profit margins of specialty brokers (compared to that of retail brokers). This is due to their recurring revenue model, secular growth trends, cross-sell and product development opportunities, and relative resistance to economic downturns.
While private equity firms with investments in specialty distributors have reaped the rewards of strong financial results, the investor expectations for this strength to continue may be challenging to meet in a dynamic marketplace.
There are ongoing risks around fronting/hybrid carriers related to underwriting acumen
A fronting carrier is an insurance company that issues a policy and cedes underwriting risk to reinsurers, (collecting a fee in the process) – essentially for the use of its S&P rating and providing other services. However, over the last several years, reinsurers have required certain fronting carriers to retain more underwriting risk, to the point that now most fronting carriers retain anywhere from 10-30%. For this reason, these firms are now more often referred to as hybrid carriers.
The hybrid marketplace has seen exceptional premium growth. For instance – in 2022, aggregated direct written premiums from AM Best-rated hybrid carriers increased by 43% year-over-year to $10.6 billion. MarshBerry estimates that nearly $13.5 billion in premium was placed in 2023. This is almost all placed via delegated authority firms and represents a significant catalyst for growth of these intermediaries enabled by private capital investments. Many of the 25+ firms in this space have announced a transaction, are rumored to be in a sale process, or are contemplating a liquidity event.
A couple of recent transaction events relate to Transverse’s sale to Mitsui Sumitomo in January 2023 and Accredited’s pending sale to Onex. Increased investment activity may contribute to pressure for continued premium growth either leading up to or following a transaction.
Recently, these pressures have manifested themselves with unintended consequences of failures related to underwriting requirements and other regulatory and compliance matters. For example, in 2023 Trisura took a $60 million hit to their balance sheet after reinsurers refused to reimburse for losses that did not meet the agreed upon underwriting standards for specific risks. A trend of these issues becoming more prevalent may present roadblocks to the delegated authority growth engine that has ramped up with the assistance of the hybrid carrier model.
Consolidators are looking to streamline wholesale relationships
Wholesale brokers face potentially losing revenue as the largest consolidators and brokers (such as Aon, Marsh & McLennan Companies, and WTW) are looking to offer these services themselves or streamline wholesale broker relationships. This creates efficiencies and will allow brokers to keep more of the commission on these policies. This shift would likely have negative implications for the largest wholesale brokers, but potentially more significant adverse implications to independent wholesale brokers as these firms are likely to lose out in either situation. In other words, top line results for large wholesale brokers will be hurt should these services be taken in house by the large brokers, however they would benefit should brokers narrow the number of wholesale brokers they work with (as they streamline the field to the largest players). However, either of these situations would be detrimental to the relatively smaller independent wholesale brokers.
Similar to the mega brokers, large brokers are looking to either bring wholesale services in-house or streamline their panel of wholesale brokers from 100+ to only a handful. Typically, those handful of wholesalers are comprised of firms like Amwins, CRC, Risk Placement Services, RT Specialty and a few other large players. These large wholesale brokers may act more as one-stop-shops for retail brokers seeking to place various lines of business and coverages across many industry types. These dynamics present a significant challenge for independent wholesale brokers who tend to be either generalists in nature or heavily focused in a narrow niche.
The big retail consolidators are gaining clout in the marketplace
There are potential industry level market dynamics to note. Due to consolidation trends and historically high valuations, some brokers have become very large placing $10s of billions in premium each year. Notably, this level of premium is often times larger than their risk providing carrier partners. This dynamic, which has emerged over the last decade, has put more operating leverage in the hands of the brokers when negotiating with carriers.
Large brokers are leveraging this to access capacity, negotiate higher commissions, and put in place or enhance contingency and profit share arrangements. This provides brokers more resources and capital to reinvest into value-add services, technology, and people. This also puts independent insurance distributors at a disadvantage as they look to compete against their growing competitors.
The rate of merger and acquisition (M&A) consolidation of specialty firms (when compared to their retail broker counterparts) accelerated in 2023, demonstrating ongoing strong buyer interest. With total M&A transactions of specialty firms increasing from 106 in 2019 to 181 in 2023, this translates to a five-year compound annual growth rate (CAGR) of 14.3%.
Rising premium volume in the specialty sector is a large driver of this buyer interest. This premium flow has driven the specialty segment premium (i.e., E&S and delegated authority premium) to grow at a CAGR of 17.8% between 2018 and 2023, compared to 6.8% for that of the non-delegated authority admitted markets during the same period. As such, wholesale brokers and delegated authority agents (commonly referred to as MGAs) are reaping the benefits – as premiums increase so do the related commission dollars. All of this speaks to the overwhelming demand from buyers and investors covering almost all forms of conventional buyer types.
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