Commoditisation & consolidation in the insurance broking industry
The insurance broking industry in the UK is worth £14.9bn and has grown steadily at 2.8% p.a. since 2013. However, the industry is now reaching an inflection point in the midst of growing commoditisation and consolidation, as well as the impact of increased digitisation. This is having a profound effect on the M&A market.
Insurance brokers are, by nature, intermediaries selling largely homogeneous products. This is revealing vulnerabilities in the context of direct selling and self-service (in the commercial market) and price comparison websites (in the personal lines market).
To address these vulnerabilities, brokers are faced with two options: re-position or race to the bottom.
- The favoured option for many brokers is to re-position away from being a traditional insurance broker that simply provides market access, towards being a value-added risk adviser. This route elevates the broker as a market expert that educates clients and provides tailored insurance and risk management solutions.
- The alternate option is a race to the bottom, which suggests engaging in fierce premium price competition, while streamlining operational models to minimise costs and maintain margins. In the current climate, brokers are doing this by adopting insuretech to offer low-cost platforms or by using consolidation to realise cost synergies (as discussed in more detail later).
Within the insuretech sub-sector, the M&A market has been very active, with phenomenal PE appetite. All four of the market-leading providers of insurance broker software are now PE-backed (Applied Systems, SSP, OpenGI and Acturis).
The traditional insurance broking industry is ripe for consolidation. It is currently experiencing a perfect storm of premium price competition and increased regulation, such as Solvency II, which is driving up operational costs and creating the backdrop for firms to seek consolidation as a means of achieving operational efficiencies through economies of scale and maintaining profitability.
Consolidation has long been a factor in the UK insurance broking industry. Historically, consolidation plays have involved large businesses and strategic acquirers. For example: Marsh & McLennan acquired Jelf and Bluefin for £286m and £295m in September 2015 and November 2016 respectively; and Arthur J. Gallagher acquired Oval and Giles Insurance for £210m and £233m in April 2014 and September 2013 respectively.
However, as the number of privately held players with scale dwindles, consolidation efforts are entering a new phase, led by ambitious, medium-sized, PE-backed businesses seeking to buy businesses of a similar or smaller size. PE investors have been attracted to the still highly fragmented insurance broking industry, not only because of the target rich environment in which Â to execute a focused buy-and-build strategy, but also because of the fundamental attractiveness of stable client retention rates and high margins that target companies offer. Recent PE platform investments include: HgCapital's investment in A-Plan, Goldman Sach's investment in Hastings, Carlyle's investment in PIB, Bowmark's investment in Aston Lark, Sovereign's investment in Arachas and Inflexion's investment in the Bollington Wilson Group.
The commoditisation and consolidation of insurance broking has been a catalyst for the emergence of disruptive operators within the industry. However, it has also fuelled a thriving M&A market as larger businesses seek operational synergies and new, innovative ways to minimise their cost base, and smaller operators struggling under growing economic and regulatory pressures seek a larger parent who can provide the shareholders with a capital event, whilst also sheltering their business and staff.