Private Equity to become a bigger force in distribution
At this year’s Insurtech Connect conference Insider Engage spoke to Adrian Jones, managing director at Hudson Structured Capital Management about how technology can improve efficiency in distribution to show the value of insurance as a product and create value for consumers.
What is driving consolidation in distribution?
Last year around 1,000 US middle-market agencies got acquired of 6,000.
That number has risen consistently for the last 10 years. At some point the math shows it’s just not possible to continue at that level of consolidation, and there is evidence of the pace already cooling in 2022.
Agencies have had an incredible run. Last year, agencies saw the highest organic growth rates in a decade, the highest profitability ever, and record valuations, according to Regan Consulting.
Private equity sponsors have driven much of the consolidation. They bought two thirds of the agencies purchased last year.
That's a big change from before the financial crisis when a variety of other buyers like insurance companies and banks who were buying agencies.
However, for private equity buyers, the days of being able to get rapid expansion of valuation multiples and create value through financial engineering are ending, or at least slowing in a high interest rate environment.
PE will have to focus on internal value creation and harmonise the operations of their agencies to extract margins and win market share.
Can you give us an idea of how much insurers spend on on distribution versus other areas?
In 2020, US P&C insurers spent $72 billion on distribution and spent $98 billion on everything else except losses. If you’re an employee at an insurance company, twice what you and everyone else takes at home as compensation is what the distribution expense costs. The stats illustrate how important distribution is but also the cost.
If we want to show consumers the value of insurance as a product, we as an industry have to be more efficient at the interface between distribution and carriers. Much of the technology here has not yet been built but will be.
How are you seeing the industry evolve – and what role is technology playing in distribution?
Technology enables better integrations between carriers and agencies, although there’s friction there to start.
Technology enables agencies to place business with the right insurer more effectively and enables insurers to use that information more effectively.
Also there is room to improve basic operations such as HR systems and finance or payments systems.
Do you think PE are more interested in the distribution than the carrier side?
PE likes distribution – it’s predictable, it’s fragmented, and it occupies an important place in the market that is not going away. Agencies can be easier to understand than carriers – for example, understanding how the rating agency and regulatory processes really work can take years. Then there’s the matter of having to capitalize a carrier balance sheet, which can be inefficient.
Where trouble could come is if an agency were purchased right at the top of the market, loaded with debt, and the market turns against them in some way. There’s no big balance sheet to absorb shocks.
Is there anything else you would like to highlight?
The insurance industry has been around for centuries and can survive almost everything that comes its way, but the industry might look quite different in five or ten years.
Insurers and carriers will evolve together, but they don’t necessarily know the moves the other is going to make – there is a lot of guessing and predicting and how is the industry going to look in five years, what technologies will be embraced, at what pace, by whom.
Lastly, everyone in insurance has trouble with data. Reinsurers talk about it in Monte Carlo, and main street agents talk about it at their conventions. Some insurance brokers have made major investments in data and are turning to carriers to monetize their data, as reinsurance brokers started doing around 2014. Some insurers will embrace the change and integrate effectively, which could give them big advantages once they do.
Adrian Jones is a partner at HSCM Ventures, the venture capital investment arm of Hudson Structured Capital Management Ltd., an alternative asset manager in re/insurance and transport. Before joining HSCM in 2021, he was Deputy CEO of P&C Partners at SCOR, where he set-up and led SCOR P&C Ventures. From 2010 to 2016, he was head of strategy at RenaissanceRe. He started his career in 2001 at Bain & Co and has lived/worked in New York, Paris, Bermuda, Brussels, and Stockholm. He has board roles at several companies.
The information herein are views and opinions of Mr. Adrian Jones as of September 2022 and may not take into account material economic, market, regulatory and other factors that could impact such views and opinions. Certain information has been obtained from sources believed to be accurate and reliable – any of which may be erroneous or change without notice. Hudson Structured Capital Management Ltd has no obligation to update or advise you of any changes or errors. There can be no guarantee that any prediction, projection, forecast, or opinion will be realized. Certain information discusses general information related to the specific industry, activities and trends, or other broad-based economic, market or other conditions and should not be construed as research. The views expressed may change at any time.