Broker consolidation is ‘a long way off becoming a real fundamental problem’

The impact of consolidation in the broking market is “definitely a mixed bag” of pros and cons – however, the industry is “a long way off it becoming a real fundamental problem” in terms of competition and choice, according to Warren Downey, group chief executive of intermediary business Specialist Risk Group (SRG).

Speaking exclusively to Insurance Times, Downey advised that “consolidation will never end up with there only being five choices” of general insurance intermediaries because “there are thousands of brokers in the UK” – but the broking sector does “have to be careful what [we] wish for”.

Downey believes the main negative arising from recent “frenzied” market-wide M&A activity is the “reduction in competition”.

He explained: “For the insurer community, having your premium concentrated with less players is rarely a good dynamic.”

As for the advantages of broker consolidation, Downey said it can support the “survival of insurance broking firms”.

He continued: “Whether [brokers face] a competitive burden, the regulatory burden, the [cost of living challenge], keeping the lights on and the business alive - consolidation helps preserve those businesses, albeit in a new form.

“[It allows] people that have put blood, sweat and tears into the business they started out of the ground to realise the value of that. That’s fantastic for them, their families and the teams that they’ve built.”

Downey further pinpointed that consolidation could help smaller firms to more easily meet regulatory requirements.

“There is another positive around the fact that in a tightening regulatory environment, bigger companies are better able to cope with that burden and [the] processes that you need to put in place,” he explained.

Peter Thompson, chief executive of BGL Insurance, told Insurance Times that broker consolidation “will be quite extensive over the next three years”, but he believes activity will hinge on the functionality that brokers have within their businesses.

He explained: “There are going to be real winners in terms of scale, investment, digital, data – all of those areas are going to be super important in determining who the winners are in the future. Those [brokers] have not got that, frankly, are [M&A] targets in reality because their long-term future certainly isn’t secure.

“There will definitely be [continued] consolidation. It’s becoming more and more obvious and evident where the winners and losers are going to be.”

‘Haven’ for investment

Private equity investment into broking firms has been a key driver of consolidation and M&A in recent years.

Downey attributed investment into the broking sector to four key factors – that brokers are cash generative businesses, are resilient and not linked to the fluctuations of the stock market, have also not showcased as many prior “horror stories” to put off investors and because they provide access to a “necessary purchase” – especially for commercial businesses.

“Insurance broking has got a bit of a halo around it,” he said.

“You can invest in [an] insurance intermediation business and you can see that business thrive, whilst businesses that are more reliant on the stock market and supply chains are struggling. So, in a portfolio, it’s a nice thing to have in there if you’re an investor.

“Businesses thrive that produce meaningful amounts of turning their revenue into cash. Insurance intermediation businesses traditionally are cash generative businesses, so that’s a dynamic that [has] helped support people’s focus on the segment.

“Also, there’s been a lot of investors [that] have invested and done well. So, not as many horror stories or difficulties or real problems [compared to] other segments.

“You’ve got a situation where the pitch is tilted towards investing in insurance intermediation because it’s slightly insulated from what seems to be happening in the world.

“It’s hard to argue that insurance broking is not a good haven within what can be quite stormy conditions.”

A ‘moment in time’ for M&A

Other threads that form part of the broker consolidation conversation is the price brokers are selling for and new market entrants, Downey continued.

In terms of price points, Downey said: “There’s been a bit of a slowdown in terms of [the] number of transactions [recently], but I haven’t seen any come down when it comes to the price that people are willing to pay for good businesses.”

Downey believes this “little moment in time” around multiples is driving broker leaders to consider consolidation now – even though it may not previously have been considered an agenda item for a good few years.

“Are these prices and multiples going to be sustained for as long as I can see? My take on it is that they are going to be sustained for a period of time, but you can’t defy gravity,” Downey continued.

“People are looking at [consolidation] saying ‘maybe it’s not a thing I can think about in two years’ time or even 18 months’ time – maybe [it is] something I should be giving consideration to now’. I would encourage people to have those thoughts.”

As for new brokers hitting the market, Downey admitted that this is “definitely harder to do these days” and that “new brokers are not appearing at the rate that brokers are being consolidated”.

This “brings up questions about [whether] the universe [is] shrinking”, he added.

For Downey, the regulation around insurance broking can put off new players because “satisfying regulators on being a going concern with proper checks, balances and compliance frameworks” means having enough staff in place to oversee these processes alongside performing the day job.

This, of course, costs money and many “startups want to have minimal costs, minimal bodies and maximum entrepreneurship”.

Although agreeing with the purpose and scope of industry regulation, Downey said it still presented “a literal barrier” that startup brokers would need to overcome in order to be successful.