Briefing: The mystery of flat top 50 broker earning margins

By Content Director Saxon East

Any seasoned broker in the UK acquisitions game will have heard this familiar narrative over the last 10 years: ’consolidation brings scale benefits, producing an efficient broker with leading margins’.

The idea, of course, is that once a bigger broker buys a smaller one, or has a merger, it can strip out the acquired broker’s core functions - IT, finance, human resources - and centralise them.

Furthermore, bigger brokers can persuade insurers to give larger commissions or special agreements in return for more volume. 

However, this year’s Insurance Times/Imas Top 50 Brokers report shows that despite a decade of consolidation, earnings margins have barely budged at 21.5%.

This also comes at a time when technology has vastly improved, meaning staff can work smarter, not harder. 

So, it is a bit of a mystery why margins have not improved.

Smaller and lower margins 

Perhaps one explanation is that the 21.5% figure from 2021’s Top 50 Brokers report is based on each individual broker’s percentage earnings margin, which is then averaged out across the whole group. 

At the lower end of the report, there are smaller brokers with lower margins. 

For example, this year there are quite a few single digit margins from players ranked outside the top 30.

Lycetts, for example, has an 8% margin, while Broker Direct’s margin is 3%.

You would never see such low margins at a major consolidator or a national broker.

Aon’s earnings margin is at 30% and Howden’s is at 29%, as recorded in the Insurance Times/Imas Top 50 Brokers 2021 report.

It might take time for the scale benefits of acquisitions to play out, but consolidators are effective at cost rationalisation and gaining more from insurers. 

It is in the management and owners’ interest to increase the earnings margin, as this will lead to a higher purchase price upon sale.

So, on an aggregate of revenue and earnings, it would probably tell a different story.