Insurance brokers have so far endured the COVID-19 pandemic in better condition than some expected, with many reporting significant revenue increases, and the outlook for the remainder of 2021 is for more growth as the U.S. economy rebounds and insurance prices continue to rise.
While executives at large brokerages say they are spending more time navigating a tough market, the increased brokerage income derived from rising prices helped balance the fall in exposure units that many experienced during last year’s recession.
As businesses bounce back, mergers and acquisitions activity in the sector remains brisk, with the volume of smaller deals accelerating (see related story). But a megamerger that was expected to reshape the top of the Business Insurance broker rankings is on hold after antitrust regulators put the brakes on the deal (see profiles here and here).
And as the pandemic subsides in the United States, brokers say they will continue with many of the practices they adopted over the past 15 months to improve efficiency and reduce costs.
When world economies locked down early last year, many brokers reacted with cost-cutting programs and in some cases salary reductions as they feared their companies would suffer sharp drops in business activity. While businesses in numerous sectors were hit hard by the pandemic, many got by with significant government support and others thrived as demand for their services rose and they maintained or increased their insurance needs.
All of the brokers in Business Insurance’s World’s 10 Largest Brokers ranking reported increased revenue last year (see chart) and while some of the growth was fueled by acquisitions, organic growth was also achieved by many. Among the 100 largest brokers of U.S. business, only 13 reported a decrease in revenue last year, despite the recession (see chart).
While there was a lot of uncertainty for brokers at the beginning of the pandemic, they reduced expenses last year and the government intervention in the U.S. economy dampened the reduction in exposure units placed, said Meyer Shields, Baltimore-based managing director at Keefe, Bruyette & Woods Inc.
“Given everything, I think the performance has been really quite good,” said J. Paul Newsome Jr., Chicago-based managing director of equity research at Piper Sandler & Co. “Business held up remarkably well and recovered more quickly than a lot of folks, including myself, thought it would.”
And the outlook for brokers is positive, observers say.
“The best time for insurance brokers is when economies are growing and insurance prices are rising, and the last several months have been the first time in quite a while that both of those conditions have decidedly been true,” said Mark Dwelle, director, insurance equity research, at RBC Capital Markets LLC in Richmond, Virginia.
Insurance rates, which have been rising for two years or more in some lines, continue to increase.
“Certainly, the market environment and rates have impacted our results positively,” although this varies by line of business, region and industry, said Ron Lockton, chairman of Kansas City, Missouri-based Lockton Cos. LLC. “We’ve had record retentions and new business this year,” he said.
Marc Cohen, CEO of Chicago-based Hub International Ltd. said that as the business of the brokerage’s clients declined because of economic conditions, their insurance spending also fell. But with increasing rates and the economic rebound, the net effect for Hub in 2020 was low, single-digit growth.
“Last year, there was an enormous amount of stress in economies all over the world, and that impacted our revenue growth,” said John Doyle, president and CEO of Marsh LLC. “We have started to see a snapback and that has helped us. There’s no question there’s been a tailwind to growth.”
While rates continue to rise in many lines, some signs of a moderation in increases are beginning to appear, some executives said.
In some limited areas, insurers are willing to match expiring rates in an effort to win new business, which effectively limits the increase that an incumbent insurer on an account can obtain, said J. Powell Brown, president and CEO of Daytona Beach, Florida-based Brown & Brown Inc.
In addition, accounts with exposures in markets that have seen significant increases in recent years, such as coastal property, are seeing lower increases on renewals this year “and in some very isolated instances we are seeing flat rates,” he said.
But slowdowns in rate increases are “on a modest basis in very specific lines,” said J. Patrick Gallagher Jr., chairman, president and CEO of Arthur J. Gallagher & Co. “We are not seeing a price reduction situation, and I think that makes sense; last year was a pretty tough year when it comes to catastrophes.”
As policyholders navigate the hard market, brokers are working more on restructuring programs and offering access to alternative risk transfer options, they say.
Clients are frustrated by price increases over multiple quarters, especially as they struggled with their own businesses during the pandemic, and are more frequently using captives, co-insurance and other self-insurance mechanisms during the hard market, said Eric Andersen, president of Aon PLC.
“Ultimately we are helping clients manage the risk as best they can, and transfer what they can,” he said.
Policyholders are looking for ways to manage their total cost of risk, such as by carrying a higher deductible or buying lower limits, Mr. Brown said.
In some areas extensive limits are hard to find. “If you have a heavy transportation account, getting high limits on an umbrella is not easy, for example,” he said.
Meanwhile, several business practices brokers took up during the pandemic will likely stick and lead to improved efficiencies, several executives said.
“What the pandemic has done is created in the mind’s eye of the marketplace a receptivity of a digital platform,” said Gregory L. Williams, CEO of Acrisure LLC.
“It evolved virtual meetings and virtual capabilities by decades,” Mr. Gallagher said.
For example, Gallagher’s real estate expert in Los Angeles previously might spend two days traveling to and from New York to participate in a meeting. “Today, given the pandemic, it’s very acceptable that she participate by iPad. Her expertise comes across and the client doesn’t blink,” Mr. Gallagher said.
Angela Childers, Judy Greenwald and Claire Wilkinson contributed to this report.