Wholesalers must keep pace with accelerating modernisation in the London market and the increasing threat of disintermediation or deselection as retailers become more sophisticated counterparties.
The largest London wholesalers have reached significant scale after a period of explosive growth, driven by private equity investment, hardening market conditions, an uptick in excess and surplus business flow into London and post-pandemic economic growth.
None of the intermediaries report wholesale revenues in isolation, but the scale of these firms shows the increased maturity of the London market.
We have explored a range of cyclical challenges facing brokers in detail in previous coverage. The upshot of these is that various macro-economic trends are curbing wholesalers’ opportunities for revenue growth.
The increase in the cost of debt has both slowed M&A activity and created additional strain on cashflows for levered brokers as the price of borrowing increases.
Consolidation, driven by PE interest in the sector and fuelled by cheap debt, has been a key mechanism for inorganic growth for some brokers. Slowing consolidation places the onus on brokers to focus more on expansion through organic growth.
The other major cyclical factor is the tapering of rate increases observed since early 2021. As pricing cools or even begins to fall, brokers’ cut of premiums shrinks.
It is also important to note London’s role as a surplus lines market means that when markets inevitably soften, business can ebb back to domestic markets once more.
These factors, however, do not affect every wholesaler in the same way. While price increases have tapered away in some lines and territories, such as global financial and professional lines, others such as property – a sizeable proportion of most London wholesalers’ books – are having a price resurgence.
In this piece, however, we turn our attention to the structural challenges that are mounting for London’s independent wholesale and specialty brokers – and look at their attempts to face them.
The chief structural challenges facing London wholesalers are pressures around a) modernisation, b) disintermediation and c) ever-more-fierce competition.
None of these are new challenges – but many are reaching a meaningful pinch-point that is forcing brokers to evolve to survive.
Modernisation/disintermediation
Modernisation demands increased tech sophistication
Scale and breadth offer the key to success
Smaller brokers without niches to suffer first
The primary existential threat to London’s wholesalers is that the modernisation of the marketplace will bring an element of disintermediation.
Examples of this include increased use of digital placement and the rise of automation, which reduces the need for extensive broker services.
The threat of modernisation as a disintermediating factor has long been present – indeed, reducing the length of the value chain through technology is viewed by some evangelists as the biggest prize on offer.
In the past decade, however, the more extreme predictions around modernisation changing the face of the market have not materialised. Rather, a more gradual process of evolution has played out. Over that time, client demand for a shorter value chain has been quelled by wholesalers demonstrating their value in securing good deals or more capacity.
There are two main factors now, however, that are bringing the modernisation tipping point closer than ever.
The first of these, in London, is the increasing focus of Lloyd’s on modernisation. Blueprint Two is not, of course, the Corporation’s first attempt at digitising and streamlining market processes – but it is perhaps the most ambitious and includes elements of compulsion that have been absent before.
The second is the inexorable development of technology in the sector and its increased use, even in the past decade. The boom in InsurTech serves as a useful proxy here. According to Gallagher Re, InsurTech funding grew from $46mn in 2012 to $521mn in 2022 as (re)insurance firms turn increasingly to tech.
Smaller and more traditional broking businesses without scale, technological capability, specialist knowledge and a variety of capabilities are likely to suffer the impacts of this first.
Cutting down the chain
Increasing pressure on wholesalers to prove their value to clients and carriers
Future of placement – the ideal model remains to be decided
A number of sources in both broking and underwriting agreed that with additional scrutiny on the (re)insurance chain from regulators as well as institutions such as Lloyd’s, disintermediation is an increasing risk for wholesalers who do not “add value” to a transaction and act merely as a signpost or “post-box”.
One senior underwriting source accused brokers of relying too heavily on providing “process” capabilities – i.e. the operational, functional side of transactions – as part of their value proposition.
When it comes to process, however, some underwriting sources said certain wholesalers are not even scoring highly on their performance here either.
“Basic competence” in functions such as processing premiums and paying claims should be a standard part of a wholesaler’s service, but underwriters complained that some intermediaries had scaled down their operational units leading to a decline in service.
“Their focus is on producing and placing, not service,” as one put it.
Even where brokers are providing top-quality processing, sources warned it could be “dangerous” to make it the key element of their offer, as the operational part of the transaction becomes cheaper and easier with the advent of modern technology.
One of the major questions facing wholesalers is what the future of placement looks like and how they strike the balance between the packaging of large volumes of smaller risks for portfolio underwriting purposes, and their focus on placing large, complex risk.
London market wholesalers have always carried out a degree of bundling of risk together to present it to underwriters in an efficient and attractive way. This model continues to develop. Some brokers utilise their connections with MGAs in territories or specialist lines to which London carriers have little access, creating binders and acting as a conduit for London capacity. At the other end of the bundling scale, brokers create facilities in which they package risks, using increasingly sophisticated automation and data, and secure agreements from carriers to underwrite a proportion.
The other model is one of brokers relying on deep, specialist knowledge and connections to place large, complex and highly specific risks. Some intermediaries employ a combination of both models for different lines of business.
The jury is still out on which of these will be the dominant model in future. Some believe that ultimately, automation will largely do away with the need for high-touch broking in portfolio underwriting.
“Wholesalers won’t be necessary for simple stuff ultimately, but they are becoming ever more important for complex things,” said one specialty broking source.
On the other hand, the thriving binders market and the existence of several London market facilities suggests that the bundling side of the market still has plenty of traction.
Overwhelmingly, carrier sources believed that the main value wholesalers bring to transactions is by being a source of detailed, expert information who can present a risk in a way that underwriters understand and find attractive.
On the other side of the transaction, there is still a strong recognition among retailers and other wholesalers feeding into London that UK wholesalers provide access to a vital source of capacity – although as we discuss below, London wholesalers are not the only route to this capital.
Size matters
Another key element that is becoming ever-more important is scale and the additional capabilities that often come with it.
Wholesale or specialty brokers that have capabilities in third-party capital and data and analytics alongside insurance are likely to win the day, as they can provide a fuller suite of services to clients alongside their traditional offering.
This is because of the increasing size and sophistication of clients, who demand ever-more holistic and joined-up services around them.
A great number of London market broking businesses are small operations, as this data shows – although it is difficult to determine how much business sits with smaller players and how much with the largest.
But even where London wholesalers have scale, broad capabilities and an understanding of complex areas of risk, it is likely that at least some business will ultimately leak away from them.
US players – taking the direct route
Some London carriers are already doing business directly with US wholesalers and carrying out the underwriting in London, and some plan to work directly with the larger US retailers where possible.
This is enabled by the global nature of many London players and the fact that dedicated Lloyd’s players are increasingly setting up international hubs.
A variety of businesses already use a variety of hubs to write business alongside a London base. These include multi-platform companies such as Liberty Mutual, QBE, Chubb, Tokio Marine and Everest, as well as dedicated Lloyd’s players looking to branch out such as Beazley, Hiscox, Ascot and Canopius.
The direct link between London insurers and US wholesale or retail brokers is partly assisted by carriers’ increasingly sophisticated online platforms, which ease the flow of business.
“If [London wholesalers] think they are the only way of accessing London capacity, they are dreaming,” one Lloyd’s carrier source said.
They added that some UK wholesalers are already adjusting their practices to account for this, accepting a lower commission of 1% or 2% to “act as a conduit” between a US wholesaler and a London carrier in recognition of their reduced role in the process.
If [London wholesalers] think they are the only way of accessing London capacity, they are dreaming
This contrasts with the customary 5% wholesale commission carriers pay on, say, a US property placement, on top of the 10% retail commission.
It is important to note, however, that the risk of partial or full disintermediation of London wholesalers is far greater with US business flowing into London, where carriers and brokers throughout the chain have established relationships, and the sources of the original business are fewer and larger.
In international business, where the retail market is far more fragmented, wholesalers still have a more essential role in bringing business together from local retailers and packaging it for London carriers.
Consolidation
US wholesalers/retailers again looking to cut number of London counterparties
Funnel of business into London narrowing, hurting smaller players
Consolidation among broking houses of all stripes has been a major theme in both the US and the UK for more than a decade.
As noted in this recent piece on Ardonagh, the London wholesale broking scene is showing signs that it may mimic the US wholesale market.
The latter became hyper-consolidated during the 2010s, partly because the large retailers consciously trimmed down the panels of wholesalers they used.
Ardonagh’s acquisition of Price Forbes and Bishopsgate, through the $500mn Corant deal, points towards a potential future oligopoly at the top end of the London wholesale market.
Other recent wholesale consolidation deals include Integro’s purchase of Tysers and Miller’s takeover of Alston Gayler, both of which took place in 2018.
US wholesalers are cutting down the number of London counterparts with which they trade. A number of US retailers, such as USI, CRC and Hub, who deal directly with London wholesalers, have already done the same.
A key aspect of the game for London wholesalers now, then, is to capture the greatest ‘share of wallet’ coming to London via a smaller number of large retailers, at least on the US side.
This narrowing of the funnel into London puts smaller wholesalers at a disadvantage where they lack the scale to service increasingly large retail trading partners, who are looking for efficiency and leverage.
The picture is not quite as simple as the above analysis suggests, however. While a large proportion of London wholesale business originating from the US comes via a small selection of the largest US retailers and wholesalers, there is also a meaningful amount coming from a vast number of smaller US intermediaries.
A proportion of these smaller brokers are capable of dealing directly with London carriers, while some need a London wholesaler to act as a conduit. It would be very difficult, however, for London carriers to deal efficiently with hundreds of US retailers directly, necessitating a wholesaler.
What next?
As a significant cohort of wholesalers reaches maturity, the question now arises as to what their end game is.
Each of the independent London businesses have differing mixes of specialty, reinsurance, capital market and UK and/or overseas retail and therefore naturally their playbooks will differ. Nevertheless, their end-game plans will shape the future of the market.
As explored by this publication earlier, we believe it is likely that Ardonagh will look to refresh its shareholder base as it continues its astronomical growth trajectory.
Howden, as we have also discussed, has turned away from the idea of the IPO it once publicly aspired to, but has major US growth aspirations and $1bn of recent financing on hand.
The ownership of London wholesale veteran business Miller, currently backed by private equity firm Cinven and Singapore sovereign wealth fund GIC, is also a current talking point.
Armed with a fresh refinance deal, BMS is now targeting £750mn in revenues in the next five years, while Tysers, having sold to Australian broker AUB, will focus its energies on wholesaling its parent group’s retail business into London.
While several of these players have plenty of runway ahead under their current ownership structures, their future decisions to sell to new backers, trade players or the Big Three brokers, or work towards public ownership, will have profound further impacts on the broking landscape.
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