Amid the rapid pace of mergers and acquisitions (M&As) in the industry, are insurance brokers that are too big to specialize, but not big enough to keep up with large consolidators, at a disadvantage?
Brokerages need significant investments to grow and scale, and some mid-sized firms may be feeling a greater pressure to sell to unlock more resources.
“I think we all see the pressures in the industry,” said Nicholas Rawluk, president and CEO of ONE Insurance. “There’s a bifurcation going on where the big ones are getting bigger, and the small ones are going to become more specialized. As a mid-tier brokerage, it's important that we try and choose our path.”
Last month, ONE Insurance announced it was merging with BSI Insurance to form the “largest Manitoba-owned” network of brokerages. Rawluk is taking the helm of the combined company under the ONE Insurance brand.
“We’re maybe a little too big [to specialize], so we needed to decide which way we're going to go within the market,” he told Insurance Business about the motivation behind the merger.
With around 100 employees and 12 branches, ONE Insurance need “a little bit more scale” to continue investing in its people and technology.
“If we're going to compete in that broader sense have a full range of services, we need to able to make the investment in technology and in our people to stay relevant,” the CEO said. “The smaller you are, the harder it is to make that big investment. With a little bit more scale, we're able to ensure that we're staying competitive on all fronts.”
According to one industry analyst, mid-sized brokerage owners don’t necessarily feel more pressure to consolidate or sell, but the challenges of owning and managing a business in general are increasing, and they might be feeling those challenges more acutely.
“When they compare the potential valuations of selling versus continuing to own their brokerage, a sale can be an attractive option for owners that don’t want to tackle those challenges on their own,” said Alex Wong, insurance practice group leader at Smythe, a professional services and advisory firm that serves Canadian brokerages.
Additionally, mid-sized brokerages may run into capacity constraints as they invest in more infrastructure and overhead for growth, Wong continued.
“The roles aren’t large enough to warrant hiring additional staff for the additional management responsibilities, so it just gets added onto the existing team,” he said.
In comparison, smaller brokers don’t need this layer of infrastructure. Smaller brokerages have shown they can thrive in their independence by focusing on niche markets and specialties, cementing strong relationships their communities, and sharing resources among themselves.
“Because of the lower overhead expenses, they can afford to specialize and not try to please everyone,” Wong added.
On the other hand, large acquisitive brokers can afford to hire professionals and teams to build their infrastructure, and later benefit from economies of scale.
Technology can be a huge pain point for mid-sized brokerages, especially as customer expectations on speed and ease of service have been influenced by big tech conglomerates – what Rawluk calls the “Amazon effect.”
“People expect more. They want that mass customization, but they want the ease of a mass market approach that’s simple, with less clicks and less questions,” Rawluk said. “We’re continually looking to streamline our processes to respect that, but also give them the feedback they want in the way they want.”
Mid-sized brokerages know that they should make better use of technology, especially to increase efficiencies. But implementing new systems can be expensive and time-consuming.
Due to capacity challenges, staffing is another major potential pain point for mid-sized brokerages.
“If they lose key team members, it leaves a major hole in their team and it is difficult to find replacements,” Wong said. “When we have had clients partner with consolidators, assistance on HR and technology issues is usually the area of support they are looking the most forward to receiving.”
Larger brokerages haven’t necessarily solved the technology or staffing problems, Wong pointed out. But they have more resources available to help address them.
“These issues aren’t unique to the brokerage industry,” he said. “The difference for brokerage owners is that they have the option to sell to consolidators at a high valuation. This option isn’t available to businesses in other industries.”
Despite the challenges, mid-sized brokerage owners can still find themselves in strong positions for growth. Their strong footholds in their communities and expertise can set them apart, even in a crowded market.
In the cases of ONE Insurance and BSI Insurance, both aligned as great investors in their workforce, and as companies that bring a lot of “local depth,” which is especially important in the rural areas they serve, according to Rawluk.
At the end of the day, brokerage owners need to be willing to invest their resources to keep up with the shifts in the marketplace.
“There’s not a single right answer for what will make a brokerage successful,” Wong said. “Each brokerage needs to evaluate their own place in their market and have a strategy to capitalize on it, but it starts with the leadership team having enough time to focus on improving the business and not just putting out day-to-day fires.”
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