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Insider In Full: Opinion: Broker bandwagon comes to a juddering halt amid Covid-19

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  • Topics:
    • Covid-19 (Coronavirus)
    • Financial Results
    • Mergers & Acquisitions
    • Strategy
    • Topical Trends

A period of major tailwinds for the global brokers, and their counterparts in the US wholesale and London market, has been stopped in its tracks by the coronavirus crisis...

Adam McNestrie

 

While better placed than carriers and many other sectors, insurance brokers are moving into a new era in which organic revenues will decline and bottom lines will be squeezed, just as intermediaries face huge challenges around operational resilience and client service levels. 

Those best able to withstand the challenges are likely to be the bigger brokers, owing to their advantages in terms of scale, capabilities and technology, but all insurance brokers will be tested.

The early impacts can broadly be divided into three.

First, brokers will have to rise to the challenge of delivering for both their staff and clients under hugely trying circumstances. 

Numerous senior broking sources told this publication that staff are their number one priority right now, with huge efforts from organisations not only to transition to remote working but also to help their workforce adjust to the realities of protracted homeworking under the threat of serious illness.

There will likely be a meaningful variation in the remote-working capabilities of different entities, with the global brokers that have invested more heavily in technology and start-ups operating without legacy systems better placed than smaller staff or private equity-owned brokers with legacy systems. 

However, alongside the issues arising from these organisational transformations, brokers will also be examined on their client service during the crisis. Initially, this will revolve around consultancy, modelling and analytics, but it will also include claims advocacy.

This will then be followed by a period in which brokers will have to deliver on programme construction and placement under far stiffer conditions than those of the transitioning marketplace during 2019/20. Brokers will be required to advise financially distressed clients, including those pushed to the brink by coronavirus. 

Second, brokers will have to absorb significant revenue headwinds, while facing some constraints around controlling costs. 

During the last financial crisis, Marsh and Aon fell to negative organic growth (-1 percent in 2009), and the size of the economic shock from coronavirus is predicted to be multiples of that seen during the worst quarters of that period, where US GDP shrinkage by quarter topped out at less than 7 percent. 

Sources expect the big public brokers to swing from the 3-7 percent growth recorded in the fourth quarter into negative territory by Q2, if not Q1. 

The squeeze will come from: a) loss of income in distressed industry verticals (e.g., hospitality, retail); b) distressed specialty lines (aviation, energy, marine); and c) reduced project-based income, which will impact areas like surety, structured trade credit and transactional liability. 

The most rapidly growing insurance brokers of those we cover – primarily the wholesalers, and particularly those in the US – may escape negative organic growth, but all will experience a major negative swing. 

Exposure falls will be partially offset by the rising rates that insurers will try to force through, pushing brokerage higher. Some sources believe that wholesale brokers in both the US and London could also see more business move from the admitted market as insurers with impacted book values scale back their risk appetite. 

Reinsurance broking could also assist the global brokers, with the potential for capital erosion and risk aversion at cedants to provoke increased reinsurance buying, along with rate rises. 

Brokers will also pull some levers to try to cushion the blow to the bottom line. 

Sources suggest typical broker travel and expense budgets range from 4-6 percent of revenues, and almost the totality of this will be eliminated. In addition, project spend around things like technology will be deferred. 

At this stage, it seems unlikely that the public brokers will make any moves to implement headcount reduction programmes due to the potential for damage to staff morale and adverse publicity. 

Indeed, sources suggest that some see eschewing such action as required to prove the good character of management. 

Third, brokers – as sales organisations and people businesses – will need to adjust to an environment where new business production and hiring will be heavily hampered.

There is still some limited account movement going on this week, but the fight for market share is about to be frozen.   

Given the degree of operational and financial turmoil, insurance clients are highly unlikely to want to move brokers. RFPs are being cancelled in large numbers, and there is an expectation that retention rates will spike to the high 90s, owing to conservatism and client distraction. 

Accounts will move only if the work is largely done already, and the decision effectively taken, or in cases of egregious errors or mismanagement.

Start-up businesses in expansion mode will face challenges as a result, as will firms that have rapidly added headcount but may now struggle to move business that had been expected to transfer. 

The talent disruption touched off by the MMC-JLT deal last year is also likely to rapidly lose pace as remote working hampers discussions and employees take a "safety first" approach. 

This could benefit MMC and slow additional revenue breakage post-JLT. Additionally, it will likely stem the first departures from Willis following the announcement of the Aon deal, although with such a long projected period to closing, it was hard to project when resignations were likeliest. 

No doubt the expansionist insurance brokers like Hyperion, BMS, McGill and Partners, and BGCI will look to digitise their recruitment efforts and stress their resilience, but it will likely be significantly harder to lure talent from anywhere and certainly to prise it from "safe havens" like MMC and Aon. 

In summary, the new era of revenue headwinds, increased client demands, heightened operational complexity and market dislocation will create winners and losers – both in the near term and further out. 

 

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