Insurance Brokers: Overcoming the challenges of acquisition-driven growth with robust integration strategies.

The US insurance brokerage industry has long seen an intense consolidation trend as both established and emerging brokers utilize acquisitions as a prime growth strategy. Mid-sized, regional brokers found this aggressive inorganic strategy to be their fastest path to top industry tiers. This article explores the consequences of this strategy, its impact on operational efficiency, and discusses four operating models that can enhance organic growth and future acquisition returns.

Record numbers of transactions have been completed for several years running, with a 15% annual increase since 2019, despite seeing an 8% decline since the peak in 2021, primarily due to economic uncertainties, increased valuations, and rising interest rates. However, as the rise in interest rates has slowed, we are anticipating a positive trend in deal activity to continue. Private equity (PE) and hybrid buyers (i.e., PE-backed buyers and privately-owned buyers with financial support for acquisitions) are driving the market, accounting for about 74% of transactions during 2022, up from less than 50% in 2013.

These transactions are happening at every level of the market –?from small “mom-and-pop” brokerages to global players, with transactions ranging from just a few million to billions of dollars. ?

Regional, family-owned insurance brokers with no more than $10 million in EBITDA are usually good tuck-in targets and are selling at 3x-10x EBITDA; brokers with $15 million in EBITDA, an EBITDA margin of 30 to 40% and a good M&A pipeline can easily fetch 12x EBITDA. Larger brokers can command even higher multiples.

There’s ample reason to believe this trend will continue as the underlying causes of consolidation show no signs of abating:

1. The market remains fragmented.
2. The widespread availability of private capital, and that capital’s ongoing pursuit of optimal returns.
3. The “roll up and scale” approach has generally delivered the target returns.
4. Sellers’ motivation, given the high valuations they can ask from buyers.

Yet, years of inorganic growth, paired with minimal integration, has left most brokers at crossroads. Various challenges now threaten future acquisitions and organic growth. As they seek the right path forward, four core operating models emerge.

Defining the vision for the operating model and integration approach

Acquisitions have proven effective in building scale and value; however, without a clear integration strategy and playbook, they add complexity to operating models and organizational structures. After years of multiple acquisitions, many insurance brokers find themselves with loosely connected networks of offices and producers with disparate ways of working and their own technology platforms.

For some companies, this may be a workable situation, at least for a time. Others, including those that want to maximize the value of every deal and a sustainable model for long-term performance, will need to make decisions about their core strategies.

Highly acquisitive brokers should define “who they want to be” as they mature and evolve into their next stage of growth. When developing their operating model vision, brokers should consider a few key variables: ?

• Reporting and accountability structures (such as product lines, industry segments or geographically), both in terms of operational management and P&L oversight.
• Models and workforce strategy for front, back and middle offices.
• Addressing legacy tech and system redundancies and complexities with integrated platforms, systems of record and workflows.
• Compensation plans and programs based on consistent principles for producers and staff; and management mechanisms promoting the right behaviors and outcomes.

To address these issues, brokers need to reevaluate their strengths, identify potential differentiators, reassess product and service offerings, and determine their market focus. To a large degree, the operating model question boils down to degrees of standardization and centralization.

• Standardization of processes and IT platforms: more standardization typically results in increased efficiencies, more straight-through processing and more consistent client experiences but may come at the cost of tailored service delivery or localized solutions.
• Centralization of operations and functions: higher centralization usually leads to more consistent client experiences across offices, which is more relevant for larger brokerages, though centralizing middle- and back-office is also attractive to smaller and mid-sized firms. The perceived downside is that centralization removes the “A team” of client servicers from the front offices. However, there are plenty of ways to assign dedicated teams and ensure client service continuity from centralized locations.

Four effective operating models

There’s no one right answer for finding the appropriate degree of standardization and centralization. Operating models must suit each firm’s unique growth strategies and ambitions, as well as its client servicing philosophy and culture. That said, through our engagement across the brokerage market, we have seen the emergence of four primary operating models:

1. A federation of producers: locally-focused teams (usually small) are supported by core platforms and basic services, such as marketing, that are provided through a home office; this is the least standardized and least centralized (and therefore least efficient) operating model – typically, it is a default when acquired firms are left to operate largely on their own and as before; brokers may find themselves stuck here unless they develop an integration plan or strategy to move toward one of the other models.
2. P&L operator: drives accountability from its acquisitions, but not the full potential of scale; through national practices, focused more on the “what” (for example, top-line and bottom-line performance in lieu of a centralized P&L) than the “how;” with compensation and rewards aligned accordingly.
3. Disciplined entrepreneur: leverages best practices and standardized processes for consistency and efficiency, but stops short of creating national or regional centers or hubs; select corporate capabilities are centralized and local offices are encouraged to adopt common methods and techniques.
4. Scaled enterprise: captures economies of scale and skill, with rigorous consistency across front-, middle- and back-offices and strategic sourcing via offshoring or regional hubs; standard approach to sales, placement and advisory services; optimizing the whole in the “company way” and seeking to leverage the full power of the organization.

While defining the target operating model is critical, it does not guarantee success by itself. To evolve from the “federation of producers” model, brokers still need a compelling vision and value proposition, and the ability to articulate them persuasively both internally and externally. Furthermore, they need to continue enhancing their product and service portfolios, cultivating strong client relationships, and expanding their use of data and analytics.

Regardless of the path chosen, brokers need a robust IT platform. Strong core platforms and applications are key to?unlocking synergies, ensuring a minimum level of “plug and play” to integrate future acquisitions. The inevitable redundancies among systems must be rationalized.

Designing and launching a new, more integrated, operating model is a lot of work. Fundamentally, it’s about bringing together disparate capabilities, ways of working and cultures, in many cases after many years of neglect. However, a well-defined operating model vision, with a clear playbook for future acquisitions, will allow brokers to continue scaling, while also ensuring long-term sustainable organic growth. For many brokers, it must be a strategic and operational priority.

Co-authors: Martin Spit ? Adam Rider

The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.