The broker community has remained a safe haven within the P&C re/insurance market, buoyed up by a hedge of commission rates, near-term positive organic growth prospects, and a strong bargaining position fuelled by the stiffly competitive soft market environment.
However, looking farther ahead, the increasingly blurred roles of brokers and re/insurers could create stiffer competition, although brokers have been taking effective measures to improve efficiency and secure their position, said financial services specialists Keefe Bruyette & Woods in a recent report on P&C brokerage.
“We maintain our positive outlook on the insurance brokers as the most attractive sub-sector within P&C insurance, especially since commission rates should be a natural revenue hedge if (as we expect) soft pricing persists in most lines.”
“We attribute most of the brokers’ positive year-to-date share price performance to broader market appreciation rather than mostly positive sector-specific factors,” analysts said.
Facilities are panels of re/insurers who agree to participate on a portfolio of broker-aggregated risks, and it’s through these innovative structures and other measures such as streamlining policy issuance, accessing broader capital pools, and discussions of quantitative risks with clients that brokers have established a strong offer of value to market players.
Nevertheless, direct-to-consumer commercial insurance distribution is expected to come in between “typically higher-margin small-account brokers, and to increase insureds’ focus on costs,” although in the short-term only a small share of the market is expected to be affected by it, said Keefe analysts.
“The small commercial P&C insurance market is still overwhelmingly served by (mostly independent) agents and brokers, but a few insurers (including Hiscox, Berkshire Hathaway, and Starr) have invested in direct-to-customer online distribution platforms for business-owners’ policies (BOPs).”
“Even assuming rapid growth off of the current small base, directly distributed commercial insurance policies will probably only account for a small percentage of policies-in-force in the near-term—personal auto insurance is a simpler product with ubiquitous advertising, and direct-to-consumer distribution still only accounts for about 25% of industry-wide personal auto premiums.”
Long-term prospects appear less secure, however, finance analysts predict some significant risks are likely to emerge and gain in scale, including a heightened focus on price that could “spill over into the agency channel, and, of course, disintermediation itself—smaller commercial insurance products that require less expensive intermediary effort generally produce higher broker margins.
“Also, one of the brokers’ inherent advantages is their ability to allocate premiums to insurers that we believe, in the aggregate, overestimate these premiums’ intrinsic value, and hence pay too much for them.
“If insureds take over the responsibility for allocating premium dollars, that “overpayment” to the brokers should also fade.”
Underwriters looking for growth opportunity while trying to shrink costs, has pushed brokers to assess how they too can reduce fees to more efficiently serve the re/insurance market and these trends have blurred lines between the traditional broker role and those of their clients.
Keefe Bruyette & Woods analysts explained that the soft commercial market has, “shifted bargaining power to brokers, who have increasingly developed “facilities”—essentially panels of (re)insurers that agree to participate on a portfolio of broker-aggregated risks.
“We agree with MMC CEO Dan Glaser’s belief that global broker data, analytics, and insight (which have all improved enormously over the last decade) increase market efficiency through facility arrangements, contested panels, streamlined policy issuance, quantitative risk discussions with clients, and access to broader capital pools, all of which lead to a stronger value proposition for insureds, brokers and (many, but probably not all) insurers.”
