David McKinnis, ANZIIF CIP and general manager of development at the Community Broker Network, points to a number of reasons for this scenario.
‘In our section of the insurance industry, there is an ageing demographic. And with the tsunami of legislation that keeps coming at us, a number of principals have decided to invoke their succession plans and exit the industry,’ he explains. ‘There’s also an emerging group of energetic, innovative start-ups. These are led by young, successful people who are keen to grow their businesses, including through acquisition.’
In April 2019, the largest insurance broker in the world, Marsh & McLennan Companies, took over another American-owned juggernaut, Jardine Lloyd Thompson Group plc, at a cost of US$5.6 billion. And, Avryl Lattin, a Sydney-based partner at global law firm Clyde & Co, believes that more consolidation is on the horizon in 2020.
Lattin says the appetite for achieving growth through acquisitions by large broking networks such as AUB and Steadfast shows no sign of slowing.
‘Clearly, a key part of their ongoing growth strategy is to continue to acquire strongly performing smaller brokers,’ she says.
A TOUGH BUSINESS CLIMATE FOR SMALL INSURANCE BROKERSIt is no secret that things are getting tougher for smaller brokers in Australia. The edge they once had has disappeared, says Kay Jackson, ANZIIF CIP and a director of Simplex Insurance Solutions in Victoria, Australia.
‘Many years ago, underwriters cancelled a lot of accounts they were servicing,’ she says. ‘Now, because of the number of authorised representatives, insurers no longer have the advantages they used to have. With authorised representatives being part of larger brokers, they have to service the smaller brokers again under this model and can no longer demand the brokers they deal with have a certain level of business with them.’
Jackson believes it is more advantageous to be an authorised representative.
‘We’re members of Steadfast, and if we weren’t, there is no way we could operate as a full brokerage,’ she says. ‘When things get challenging, we can use the triage system. The difference is amazing when you’ve got somebody a lot bigger supporting you. They will say exactly the same thing and get a different outcome to what we would as a little, single voice.’
According to the CEO of Navigator Insurance Brokers in Hong Kong, Clive Wolstencroft, the main downside of remaining small is lacking sufficient volume to be able to negotiate with insurance companies.
‘The challenge is not having enough volume in any particular area to build an economy of scale,’ he says. ‘It means you need to make sure your staff are trained in a whole range of products. If you can provide a personal service, you will have a niche against the bigger players who will typically run in a more systematic fashion.’
Wolstencroft’s firm mostly caters to expat professionals in Hong Kong’s financial sector. Often, his clients have been bankers who have moved into selling hedge funds. ‘Because we have a relationship with them, we will typically keep taking care of their business vehicle,’ he says.
‘It’s a competitive market out there, so it’s a matter of who gets to them first. But provided you keep taking good care of them, they don’t look elsewhere. They’re busy people.’
PROS AND CONS OF STAYING SMALLIn Australia, the Hayne royal commission has been cited as a factor that is making life more difficult for smaller brokers in particular.
‘I’m not always of the belief that bigger is better; it’s just the way the market is going,’ says Jackson.
‘You have to be a certain size to stay on top of all the compliance that’s coming out as a result of the royal commission.’
Speaking at the 2019 National Insurance Brokers Association Conference, the Australian Financial Complaints Authority commented that was unfortunate brokers were the ones who were penalised with extra compliance because ‘brokers are not what’s keeping it awake at night’.
Lattin agrees and understands why smaller brokers may see the appeal of joining a larger broker group that provides risk and compliance services.
This has been the case for Lisa Carter, who established Clear Insurance in Sydney a decade ago, which only has a headcount of five.
‘The extra compliance costs don’t apply to my business, as our licensee, Insurance Advisernet [IA], takes care of all compliance under our authorised representative agreement,’ she says.
‘As a platinum practice of IA, I operate my business within the IA “best practice” guidelines to remain compliant. It’s business as usual as far as I’m concerned.’
Her award-winning business is thriving, and she cites multiple benefits of staying small.
‘The advantages include fewer managerial headaches, fewer overheads, and with a low client count, high-end small and medium-sized enterprise [SME] book, you can invest more time in intensive personal client relationships,’ says Carter.
She finds this approach more satisfying than the11 years she worked for a large international broking firm, and her profitability has increased 10 to 15 per cent year on year.
‘I can add value by acting in my clients’ best interests as a risk and insurance adviser rather than an order-taker with large numbers of administration staff pumping out policy renewals. We focus on high-level strategic advice.’
Carter believes the way corporate brokerages service their clients is completely different to a boutique brokerage like hers.
‘Ours is more personalised, and we find our high-end SME clients prefer that level of service,’ she says. ‘They want to know that they’re going to get the same person on the phone, who knows what they’re talking about.’
Abbie Wilson is the director and sole employee of National Insurance Brokers in Sydney, which she founded in 2013. She points out that while it can be difficult competing against big brand names, she has no shortage of clients.
‘I provide a personal service,’ she says. ‘I know a lot of people say that, but I really mean it. I go to my clients and talk to them; I become part of their team. It’s different from just ringing someone up and never meeting them, but continually asking them to pay a bill.’
However, Ease Insurance Brokers takes a different approach. It is based in New Zealand and has three financial advisers, each of whom offers phone and email consultations to its clients across New Zealand. Co-founder Andrew Ball, who established the brokerage in 2009, says clients prefer this to face-to-face meetings, as it tends to save them time.
Ease Insurance Brokers has plans to grow, but not beyond a headcount of eight, says Ball.
He adds that the prospect of managing dozens of different personalities doesn’t appeal to him and that he prefers the work culture of a smaller organisation.
Another factor that makes him disinclined to want to become a large brokerage is that, like Australia, New Zealand is going through a period of increased compliance as a result of new legislation.
‘If we had a headcount of more than 15 people, which would be considered a large brokerage in New Zealand, it would become more difficult to manage staff. You would need to ensure that everybody who is working for you is always doing everything 100 per cent correctly, because you have liabilities and that would take considerable time.’
WHAT DOES THE FUTURE HOLD FOR INSURANCE BROKERS?Wolstencroft’s strategy for the future is to launch new products, such as exclusive medical insurance, by working with other insurance companies around the world.
‘The idea is that we become like a wholesaler, as well as a retailer,’ he says. ‘So if there are products to be sold in the market, then people need to come to us or we will get credit for their sales.’
PricewaterhouseCoopers Australia partner James Hocking sees both opportunities and challenges on the horizon for small brokers.
‘Small brokers continue to play a key role in servicing Australia’s large geographic footprint,’ he says.
‘However, if the revenue model is challenged following the Australian Securities and Investments Commission’s review [in 2021], it may trigger further consolidation at the smaller end of the market and create coverage issues for clients.’
Brokers with a good understanding of the market and their clients’ needs will likely continue to flourish, regardless of their size. Nonetheless, with rising compliance costs, moving to a broader network has an undeniable appeal.