I started working in the insurance business in 1998. I was a twenty year old student at Penn State University, where I studied economics and business administration, and I attended a career fair seeking a “real life experience”. I spent the prior summertime working as a licensed real estate agent in Bethlehem, PA and felt discouraged that I could not find a senior real estate professional in State College who would accept me as some form of peon, willing to work for free for mentorship and experience. I met a fellow named Mike, a district agent for Northwestern Mutual, who ultimately became my boss, and subsequently a dear friend.
Over the following two decades, I have invested into learning the businesses of personal financial planning, business-use of life insurance, employee benefits consulting, retirement plan advisory, retail investment brokerage, wholesale employee benefits, and agency management. The ride has been wonderful, and all goes back to that first connection with Mike. I feel blessed.
I earned an MBA in corporate finance and general management from NYU-Stern. One of my favorite courses was Corporate Strategy with Sonia Marciano. We spent time analyzing the market structure of various industries. Indeed, I concluded that market structure determines much of the range of outcomes available to a firm. I view myself as a “student of the business,” yet I never took time to invest into a deliberate analysis of the market structure of insurance agencies. So, thank you state-imposed isolation, I will do so now!
I have invested time during evenings and weekends to consolidate sources of data to supplement my own observations and knowledge. Sources of data and analysis include reports from The Fredonia Group, Market Line, MergentOnline, Plunkett Research, Risk Management Association (RMA), and various SEC filings.
Insurance Agencies | What do they do?
Insurance agencies provide many services to consumers. Ultimately, although there are numerous aspects of the customer experience the insurance agent is involved with across insurance-types (e.g. life, P&C, personal lines, employee benefit, etc.), it is highly consistent that agents are paid for placing policies (i.e. commission payment), but then become involved in additional tasks. One obvious example is, in the employee benefit space, customers have a need to access resources to navigate the evolving environment, due in part to the FFCRA and CARES Act. In some ways, like with the ARRA and PPACA before, this need is largely filled by insurance agencies. Agencies/brokers are pleased to do so, especially when rewarded with renewal orders and new accounts!
Below are estimates of the distribution of US insurance agency revenues by insurance-type. Notably, the distribution skews towards personal lines and commercial lines P&C. Not surprisingly, although there is variation across brokerage firms in the share of revenue across these categories, it is common to find a larger relative share in commercial lines P&C.
Growth
An area of personal curiosity about the insurance agency market is total size. Fredonia Group estimates, per below, US brokerage and agency revenue at $162 billion. Fredonia and MarketLine both estimate future CAGR at 3.6% (MarketLine) and 3.8% (Fredonia) for the period 2018-2023. Also, this analysis by Plunkett suggests an industry revenue of $139 billion:
There are continued consolidation trends in the industry. You could write an entire series of posts about the rationale for this consolidation; I suggest, at a high level of abstraction, the reasons converge around three prevailing trends: demographics of existing agency owners, consumer demands for services, and the state of current capital markets. Optis Partners, a management consulting firm focused on insurance agencies M&A services, categorizes buyers into the following categories: public, private, hybrid, and other. The following analysis was created in Q1, ’20 by Optis:
Information about insurance agency revenue over the period 2008-2018, per Fredonia, is included below.
There are interesting gaps in my detail here. Some areas I am interested in, which I have not seen great data on, include: a) How many agencies are in the marketplaces in each segment, and what is the rate of agency formation? b) How many of these agencies operate with less than $5MM revenues, and what are normalized financial metrics for these firms (e.g. revenue per employee and EBITDA margin)? What is the trend in concentration amongst the largest players in the marketplace over time?
Profitability
The insurance brokerage industry is interesting, in part, because of the important roles of both sophisticated, publicly held, global players, as well as entrepreneurs with virtually zero capital and strategic lock in profitable books of business. Examples of EBITDA rates as a percentage of total revenue from some of the largest players, Aon, Gallagher, and Marsh, are included below:
| Company Name | EBITDA Margin % – latest | Gross Margin % – latest | LT Debt to Equity – latest | ROA % (Net) – latest | Selling Gen & Admin % TR – latest | Year |
| Aon plc (Ireland) | 24.79% | – | 1.96 | 5.49 | 75.18 | [2019] |
| Gallagher (Arthur J.) & Co. | 10.65% (17.20% of GM) | 61.92 | 0.74 | 3.72 | 46.41 | [2019] |
| Marsh & McLennan Companies Inc. | 19.45% | – | 1.38 | 6.58 | 58.46 | [2019] |
RMA compiles financial results of insurance agencies and summarizes in common-sized format, segmented by revenue cohorts. This analysis shows a range of EBIT as a percentage of total revenue of 13.4%-17.2%.
Differentiation
Differentiation is a challenge in the market, where barriers to entry are low and MES in the SME segment is low. Anecdotally, as one moves from brokering solutions for personal lines and micro-commercial risks to mid-market commercial to Fortune 1000, there are increasing expectations by the client for solutions requiring incremental investments into assets and capabilities, and therefore capital. So, to comment intelligently on differentiation amongst agencies requires first identifying the segment within which one is assessing.
For example, solutions to address needs in the micro-market can largely be sourced through outside partners and an agency principal is largely able to, credibly, be viewed as an expert at underwriting, compliance, population health, and customer service; Expectations at clients in larger segments will cause firms to internalize additional in-house resources specialized in each of these areas. As such, there is more opportunity to differentiate as clients become more sophisticated.
Five forces
Porter Five Forces analysis provides some level of insight into industry structure dynamics.
Buyer power – there is limited buyer power for most insurance agencies. Although it may be true that, anecdotally, many smaller (e.g. <$5MM revenue) agencies have a small handful of larger customers that could assert power, generally this is not a primary influence on agency financial results.
Supplier power – there is some modest supplier power for most insurance agencies, in the form of insurer decisions around contingent and supplemental commissions and/or decisions to restrict appointments as a function of competitive positioning.
Rivalry – there is a high level of rivalry within the business. This can be described by larger, national (or global) firms; This is particularly relevant in the Fortune 1000 market, and includes competition across a handful of large players, including Marsh, Aon, Willis, and Gallagher. There are also numerous national firms focused on the middle market, including USI, Lockton, AP, Acrisure, NFP, and Alera. Finally, most local markets have a handful of well branded, privately held firms, as well as numerous competitors with limited branding and limited differentiation.
Entry – there is nearly zero barrier to entry and, to serve personal lines and SME, very low MES. MES increases as unique assets and capabilities are necessary to serve larger commercial needs.
Substitution – although there are technological efforts to displace tradition (i.e. non-digital) agencies (as well as insurers), there has been limited traction in this space.
Concluding thoughts
I think the US insurance agency and brokerage industry is incredibly interesting. A vital issue is the aging of legacy industry leadership. For a variety of reasons, the insurance industry has, anecdotally, fewer talented leaders in place to succeed established leaders than are required over the coming fifteen years; The consequences on the industry are TBD.
There is great opportunity to serve American households and employers in a profitable manner. The opportunity to define a clear value proposition for a specific segment, and create economic value by effecting both revenue and cost synergies, with responsible use of leverage, creates an enticement for players to continue to look to consolidate. Any firm that can execute on such a game plan and exploit emerging threat of disruption (i.e. technological, regulatory, etc.) should be well positioned to earn economic profits.