JANUARY 2018 THE THREE C'S: HOW CONSOLIDATION, CUSTOMIZATION AND COLLABORATION WILL CONTINUE TO IMPACT COMMERCIAL BROKERS IN 2018 - PWC
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
www.pwc.com/us/insurance
The three C’s:
How consolidation, customization and
collaboration will continue to impact
commercial brokers in 2018
January 2018
2 PwC Top issues
The three C’s:
How consolidation, customization and collaboration will
continue to impact commercial brokers in 2018
of 414 transactions from 2011 to 2015.
As we first noted in our 2014 publication, Looking forward, the factors that are
Broking 2020: Leading from the front driving consolidation and greater levels
in a new era of risk1, trends reflecting of operational efficiency include a low
larger macroeconomic forces have interest rate environment, the presence of
been fuelling a contentious debate alternative capital providers, and ongoing
between brokers and underwriters on demand for expanded broker capabilities.
compensation, leading to a “war of
words” in 2017 that saw leading players Customization: Overall, the desire for more
on both sides to invest to reinforce their localized market knowledge and custom
market positions. The same trends are products is a strong and recurring trend,
also driving increased customization of with historically strong insurance hubs such
products, increasing reliance on direct-to- as Lloyd’s recognizing the increasing need to
consumer models, and greater economies meet local demands. For brokers, the need
of scale for an increasingly large number is clear: provide local knowledge coupled
of market participants. Collectively, we with global scale to rapidly place risks across
categorize these trends into the “three geographies.
C’s” of consolidation, customization and
collaboration. Collaboration: Technologies such
as Blockchain have the potential to
Consolidation: We continue to see overall fundamentally transform insurance
consolidation of the brokerage market; processes providing both efficiency savings
Conning tracked over 450 transactions and greater levels of information to both
through October 2017. This activity brokers and their customers. Depending on
compares favorably to 537 transactions its ultimate implementation, it is possible
in 2016 and a longer term annual average that brokers could operate within a fully
1 Available at http://read.pwc.com/i/391105-broking-2020-leading-from-the-front-in-a-new-era-of-risk.
3 PwC Top issues
electronic process or be innovated out of (many brokers have renewal rates conversion and retention ratios. 3. Demand for Local Market Presence –
it (i.e., be replaced by electronic platforms in the 80%- 90% range), as well a As risk managers struggle with
and algorithms for many categories of systemic diversification outside of the increasingly complex risk exposures,
risks). Ultimately, the broker’s place in debt and equity markets. With ongoing they are looking for brokers to
the insurance lifecycle likely will remain low investment yields, the presence of provide enhanced services across
despite increasing automation, but for those alternative capital is expected to continue their enterprises. While this would
risks from which an intermediary can be influencing the market. Their “hunt seem to benefit the largest brokers, we
removed, disintermediation will occur. For for yield” has raised broker multiples, believe there is a growing appetite for a
example, we have seen innovative carriers and created a feedback loop of higher seemingly contradictory skill-set: a global
such as Hiscox offer a direct to consumer valuations and higher deal volumes. footprint with enhanced local knowledge
model for small commercial risks. – which puts pressure on brokers to
2. Stagnant Revenue – Despite some expand their footprint in new or existing
Trends that impacted the personal short-term hardening as a response to locations.
lines market in prior years are catastrophic events in the second half
beginning to impact commercial lines, of 2017, we believe generally favorable For brokers whose operating model is
with risk managers looking for more loss experience and historically high “hub and spoke” with branch offices
customized products and technology- policyholder surplus will continue to remitting central placement to a global
driven innovations for even the most pressure pricing for the foreseeable office, we believe smaller specialist firms
specific product classes. future. As a result, premium pricing could that can provide immediate service on
remain soft across most commercial the spot will continue to compete strongly
Consolidation – The commercial brokerage classes, thereby restricting both premium against brokers that are unable to provide
market has experienced continued and commission growth. comparable, enhanced local support.
consolidation, with the top ten brokers In fact, this expectation goes beyond
generating 2.5 times more revenue than This ceiling on commission growth will the brokerage side of the value chain to
the next 90 brokers in the market (Conning challenge brokers of all sizes to improve insurers and even placement markets
Insurance Segment Report: Property – their internal cost structures, particularly such as Lloyd’s, which are increasingly
Casualty Distribution, p. 2). We believe that for back-office processing, which can challenged to provide more efficient and
three trends are driving this M&A wave: represent well over half of their operating localized service.
costs. They are increasingly able to do
1. Alternative capital – Alternative this through technology initiatives that
capital providers (e.g., hedge funds, automate standard and/or low-value
private equity) have continued to play processes, as well as introducing better
a role in accelerating consolidation, analytics and sales tools to increase
lured by consistent revenue streams
4 PwC Top issues
Related, PwC’s 2014 “Risk Buyer Survey” • Insurance as a product: These buyers
noted that risk managers ranked price- view insurance as a product and
driven change as the third most likely transaction, and therefore look for the
reason to switch brokerages, below service best combination of price and ease of
capabilities and geographic reach. This doing business.
strongly implies that brokers must continue
to expand their service offerings while “Insurance as a service” buyers look for
simultaneously offering local market bespoke risk management services beyond
knowledge and global scale. placement. Their carriers need to provide
risk advisory, value-added services such as
Three trends will continue to fuel site audits and close interaction with the
the broker consolidation wave: company’s internal finance and accounting
alternative investors bringing new departments to align their insurance
capital to the market, stagnating portfolios to their risk exposure. A relevant
broker revenue driving efficiencies of example is Hartford Steam Boiler providing
scale, and demand for greater local site inspection and engineering consulting
market presence. as a complementary service that moves
beyond risk transfer into a recurring • Direct to consumer carrier: Insurers Consumers are increasingly
Customization – Current operating models advisory role. such as Hiscox offer a consumer-facing looking for more customized buying
need re-assessment as insurance buyer website that allows SME markets to quote experiences and products from all
demands change. Beyond price, buyers are On the opposite end of the spectrum, select liability exposures directly. industries. Commercial risk buyers
looking for a variety of choices and flexibility “insurance as a product” buyers look for are no different, and as buyer
when working with their insurance brokers. a variety of insurance choices and the • E-brokerage: Internet brokers such as expectations change, brokers will
The demand for choice has begun to split ability to compare and build more modular Coverhound allow purchasers to submit need to align their business models to
the commercial market, with buyers falling insurance products as needed. These buyers quote information on-line. their targeted buyer profiles.
into two behavioral groups: look to on-line solutions for their purchases
and want to easily understand products for • Peer to peer: Start-ups like Lemonade Collaboration – In the US alone, Conning
• Insurance as a service: These buyers which robo-advisors and comparison sites and Bought by Many may displace the has estimated that 3,000 insurance
look for comprehensive risk management are becoming competitors to traditional entire insurance model with peer-to-peer companies and over 30,000 agents and
solutions and view insurance as a set of brokerages. risk pooling. brokers serve the insurance market. Looking
services (risk transfer, risk management forward, Blockchain could enable common
and risk mitigation) that can lower their While still nascent, we believe there are a data sharing across this fragmented market.
overall exposures to loss. number of new market entrants that can Two possible scenarios could play out,
challenge incumbents in the “insurance as broker-centric v. direct-to-consumer.
a product” space:
5 PwC Top issues
In either model, Blockchain has the In addition, as we noted in Broking 2o2o,
potential to transform the (re)insurance one way brokers can create value in this
value chain, including: environment is to become risk facilitation
leaders. This role would connect various
• Risk Management – Blockchain could be industry leaders, (re)insurance leaders,
combined with other Internet of Things and governmental officials on select
products (such as RIFD) to track the risks (e.g., cyber) to discuss holistic risk
transport of high value goods. management solutions. Brokers seem
ideally placed to facilitate such discussions,
• Policy Validation – Blockchain
which would provide them an opportunity
implementation could support policy
to move beyond risk transfer and become
validation in real-time, minimizing
a collaborative partner in their clients’
coverage validation and improving
operational success.
subrogation/recovery capabilities.
Steps to create insurer-to-insurer (I2I) PwC’s 2014 Risk Buyer Survey supports this
communications have already begun, idea: 67 percent of risk managers considered
with the carrier-led “B3i” initiative their brokerage firm a “trusted advisor,”
between Aegon, Munich Re, Zurich, versus 46 percent who simply viewed
SwissRe, and Allianz to link the themselves as a “placer of coverage” (Note:
numerous insurer-specific use cases for respondents were able to select multiple
Blockchain. choices, resulting in values greater than 100
percent).
• Reinsurance – Complex, multi-layer
reinsurance contracts could be managed New technologies such as Blockchain
on a common Blockchain, allowing could provide the insurance industry
participants to automatically track and a unique opportunity to collaborate.
managed ceded/assumed premiums and How these technologies will impact
losses. the industry remain to be seen, but
forward-thinking (re)insurers are
already establishing collaborative
initiatives to establish proofs of
concept.
6 PwC Top issues
Implications
• Faced with the “three c’s” of • Brokers could position themselves to
consolidation, customization and compete in price-sensitive “insurance as
collaboration, we believe brokers a product” markets and/or establish risk
have an opportunity to implement management/advisory offerings to serve
proactive changes before these trends “insurance as a service” buyers.
cause even more disruptive change(s).
Changing buyer demands will require • Emerging technologies such as
brokerages to reassess their operating Blockchain have the potential to
models in order to confirm they provide disrupt insurance placement and
the correct balance of enhanced local policy management processes. Brokers
market knowledge and scale efficiencies. should establish a plan to leverage
these emerging technologies to manage
• Industry consolidation will further or avoid disruption from new market
concentrate market power. Smaller entrants.
brokerages need to determine the
appropriate business strategy for a
market where the top ten brokerages
produce 2.5 times revenue as the next
90 firms.7 PwC Top issues Contacts Richard Mayock Marie Carr Global Insurance Brokerage Leader Principal, PwC Strategy& +1 646 471 5090 +1 312 298 6823 richard.mayock@us.pwc.com marie.carr@pwc.com Jamie Yoder Matthew Wolff US Insurance Market Leader Director, PwC +1 773 255 2138 +1 847 650 7348 jamie.yoder@pwc.com matthew.wolff@pwc.com Francois Ramette Joseph Calandro, Jr. Principal, PwC Strategy& Managing Director, PwC Strategy& +1 773 612 7952 +1 203 906 6595 francois.ramette@pwc.com joseph.calandro@pwc.com www.pwc.com/us/insurance At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwC does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
You can also read
