The new normal: Key takeaways
• With Aon and MMC dominating the market in terms of scale, ‘relevance’ will become an ever-more important differentiator for challenger brokers
• Previous waves of broker M&A tended to result in a burst of activity in other areas of the sector, rather than stagnation; this wave is likely to be no different
• While a certain scale is necessary to meet the regulatory and compliance costs of handling large accounts, understanding and anticipating client needs will be key to servicing accounts of all sizes
• With risk management functions increasingly divorced from the risk-taking elements of an organisation, brokers have a growing role to play as business strategy advisors
• While investment in data capture and analytics has become a must-have for brokers of all sizes, to be truly effective it has to be matched by a technical understanding of clients’ risks
• Specialist knowledge, innovation on products and services, and an entrepreneurial approach will always be in demand in an evolving market
Following Insider Engage's look at how niche operators and bigger challengers are seeking to differentiate themselves from the mega-brokers, and a follow-up piece on start-ups, scale-ups and the war for talent, we take a look at how the remainder of the market is positioning itself as the Aon-Willis deal rumbles towards its conclusion.
History shows us that change brings opportunity. Volcanic eruptions have created fertile farmland; revolutions have altered the course of political and social history; and the recent pandemic has boosted virtual meeting room stocks by hundreds of percent.
Some opportunities may be more permanent than others, but all change brings potential for progress. This is where the insurance sector finds itself, as it awaits the dawn of the “mega-broker”. But rather than the opportunities falling to the biggest purveyors of this essential service, the story is actually much more nuanced.
“Client business is driving the future of the industry,” says James Berkeley, managing director of Ellice Consulting.
The business consultant and Aon alumnus suggests the discussion around how the influx of mega-brokers may change the market should be turned on its head.
Rather than looking at how a giant Aon-Willis or MMC-JLT could dominate the market, the more relevant question is what the client will be wanting from these merged entities as well as their smaller competitors.
“What are the pre-existing client needs for expertise in the areas of broking and consulting today and what are the anticipated needs of those clients?” he asks.
Changing social demographics, technological advancements, changes in societal laws, shifting views on climate risk, ESG and sustainability, and new thinking around IP protection – the list goes on.
“Those are anticipated market needs we see for insurance, advisory expertise, and transactional expertise,” he says.
Arguably, not all of these needs can be tackled just by virtue of being a bigger player.
Berkeley says there is a third element to client needs, namely those “that brokers can create [and] that clients haven't thought of before. Needs that simply haven't had solutions, products, services, or relationships to address them [before”.
This concept centres on how to use insurance capital to match clients' enterprise risk – and it is here that there is opportunity for all.
For Mike Papworth, head of property and casualty at Miller, broking is all about bringing value to retail, wholesale and reinsurance clients alike.
“All of them are trying to improve their financial position and reduce volatility from their balance sheet,” he says. “As a broker we have to be able to understand that and translate it into a financial transaction that makes sense to them. To do that we need to remain relevant.”
The relevance challenge
This question of relevance is the key opportunity for the sector, rather than it playing out as a bare-knuckle, David-and-Goliath-type event.
Given that the broking market changes roughly every 10 years for various reasons, argues Papworth, this is just the latest episode in an ongoing series.
“In 2000, there was a wave of mergers in London,” he says. “Everyone thought these bigger brokers would end up dominating the whole sector. In reality, there was a combination of spin-offs. People broke away to create new companies, others went alone, others came together to build scale. You're going to see a combination of all of those this time around.”
These giants and spin-offs will enter a market that is already facing this relevance challenge – and brute force is unlikely to be enough to win every client.
“Could a British Airways-size insurance programme only be handled by an Aon, Marsh or Gallagher?” asks Berkeley. “A small tug can pull a jumbo jet. We know physically that it doesn't always require very large organisations to undertake the work. It's just a question of how they're structured.”
Along with the financial structure – a certain scale is needed to back significant regulatory and compliance costs – how these organisations are put together and run is also going to be of critical importance.
Insurance has always been a people business and even in the age of the mega-broker talent, and what companies do with it, is essential as the focus on where the demand is likely to come from is shifting.
“A key element for all brokerage businesses going forward is understanding who the economic buyer is individually,” says Berkeley. “Who can write the cheque? Who can approve the expenditure on insurance spend, who will claim credit for having put in place insurance?”
In companies of all sizes, the buyer of the insurance is changing as the risks they are seeking address are changing too. From extreme to mediocre risks, companies in all sectors and of all sizes are becoming increasingly aware of the impact their businesses face.
For example, what risk manager for a lower league football club had “global pandemic” on their risk management checklist 18 months ago?
Insurance is no longer a hedge
This is where the opportunity will lie for small and mid-sized brokers and it is arguably the challenge for the larger firms: understanding and anticipating the changing client needs – and finding a way to transact on them.
“The advisory community is awash with non-risk takers who are advising on risk,” says Berkeley. “The future of systemic risk is now an issue at CEO and board level, but risk management has been structured a bit like HR - it's become increasingly separated from the risk-taking elements of a business.”
While the floors of the mega-brokers may be packed with salaried individuals who have built up a risk management rolodex over time, this may not be enough going forward. Understanding the impact a huge range of existing and new risks may have on a business, rather than just getting a good price on renewing a policy, looks increasingly likely to be the future for brokers.
There is a still a role for those who can quickly transact and implement day-to-day policies with underwriters, but the growing opportunity to truly partner with businesses may make the functional approach that has crept through the sector obsolete.
“Future brokers are increasingly expected to be business strategy experts, able to apply their expertise as strategic advisory and risk management,” says Berkeley.
This could mean that brokers who are owners of their own businesses - and therefore risk-takers themselves – will find a more interested audience with company CEOs or CFOs.
Miller was recently bought out of the majority stake owned by WTW with a combination of private equity and sovereign wealth capital. And according to Papworth: “Even some of the biggest buyers will come to us because of our expertise. That's going to remain relevant in five, 10 years and beyond.”
Nadine Moore, managing director and partner at Boston Consulting Group, believes small and medium size brokers can continue to compete with larger brokers on several fronts.
“Winning the customer, customer satisfaction and all the servicing that goes along with it still matter,” says Moore. “Winning today is often built on more than relationships, it is backed by strong value propositions including services you can provide the client.”
And playing a role in a niche or specific industry is also a useful strategy.
“For years, middle market brokers have won footholds in sectors like construction and energy, or in products like trade credit or cyber,” she says. “That strategy still works but it now needs to be augmented with digital capabilities.”
Data is crown prince
Digital is overtaking the industry from carriers through to brokers, says Moore, but again, biggest doesn’t necessarily mean best – and owning the distribution doesn’t necessarily give an advantage either.
“Smaller brokers can apply digital concepts to become more effective at acquiring new customers more easily than larger brokers,” she says. “In addition, providing insights with data and analytics, creating frictionless servicing options, and helping drive outcomes in the market based on data are key opportunities for smaller brokers.”
For Papworth, data is already a game changer for Miller. “We can develop our own data and do our business planning around it,” he says.
“We have a significant team of people that look at data and give us information, which is probably as accurate - if not more accurate - than the big brokers, because it is very granular and detailed, whereas they necessarily work to the law of bigger numbers.”
Like any tool, the data is only as good as what you do with it, however.
“It's not the data itself that's valuable, it's the transference of it,” says Berkeley. “[When] you capture data, it needs to be formatted into information - information that needs to be in [your] hands, [and] needs to be applied to the knowledge of the broker and the client at the right time and at the right place to create meaningful knowledge.”
The next step is turning this knowledge into wisdom and applying it to the key organisational issues of a broker’s client. This enables the client to make wise risk-taking decisions consistent with their company’s strategic objectives.
Berkeley warns that the insurance sector’s near-obsession with data has, in large part, missed the point.
“The investment by all brokers in data and analytics has far outstripped technical understanding of risk and how it is evolving,” he says.
He believes that while many solutions have been created to solve myriad issues, understanding how risk is a part of general business has barely evolved for 30 years.
Harnessing data is therefore key, but only if used efficiently and in a targeted fashion – and this is an important element for the mega-brokers to consider, too.
“The journey to becoming a bionic broker can be a large undertaking, so pick an area that is important to the value proposition of your business, start there, test, learn and grow,” says Moore. “The promise for the end client is better service, powered by better insights and delivered with a frictionless digital experience.”
At the very top of the market those benefits can be delivered at scale, but that is not to say that middle market and smaller brokers do not have a chance to deliver on that promise.
“Really, clients will benefit from the innovation and pace that the overall market is setting,” says Moore. “In a hard market, that innovation can deliver real value.”
The mother of invention
Already, brokers, underwriters and clients alike have seen how digital innovation can be forced by disastrous change.
“It’s taken Covid-19 to develop an electronic platform that works perfectly well,” says Papworth. “We still need the face-to-face discussion and the knowledge of people, but not to the extent where extremely well-paid people stand in a queue in Lloyd’s for hours on end to have a chat with someone and then walk back across the road. We did in two months what we’ve been told couldn’t be done for the past 20 years. It’s a more efficient way of working.”
Whether large or small, it is clear that innovation and expertise are going to be vital to succeed in the world of the mega-broker. Boundaries are made to be broken – it just needs some courage.
“There’s insufficient innovation happening inside brokers on products, services and relationships,” says Berkeley. “That's reflected in the in the absence of creating sufficient need for clients and the huge gap between economic and insured losses.”
For Berkeley, the role of brokers and underwriters needs to be fundamentally reassessed. Instead of focusing on titles, people on both sides need to be more effective at clearly articulating their expertise.
“We're awash with implementers who are able to deliver, we are underweight in people who are rainmakers or close business – and that's the hardest piece of the business going forward,” he says.
“Whether that is in dealing with pre-existing market needs and clients, anticipated market needs of clients, or creating new needs for clients for insurance, which is the single biggest challenge.”
Is the market rising to this challenge? Miller’s Papworth thinks so.
“Speaking to my counterparts, there's more enthusiasm now than at any time in my 30 years about the opportunities - and this applies to underwriting as well,” he says.
“It’s time for creativity and entrepreneurial spirit. There will be people who just cannot adapt to this environment. But it has to be the way forward. We have the data, the technology and we've continued to trade. And we have the client relationships that want and need our expertise.”
To read part 1 of this feature, click here, and for part 2 click here.
