Insurance Thought Leadership:
Mark, it’s great to have a chance to catch up a bit.
I saw that Hub International recently took a minority investment that put its valuation at $23 billion. It, Acrisure and some others have been so acquisitive that I’m reminded of a cartoon I saw back in the early 1990s when all of corporate America was in the middle of a takeover binge. The cartoon showed a table of stock prices from the New York Stock Exchange, but there was only one name listed: IBMGEAT&TMicrosoftIntel etc. There were probably 20 more names tacked on.
With that as prelude, what are you seeing in terms of agency consolidation?
Mark Breading:
It's a really dynamic environment and has been for the last number of years, but it's kind of interesting because the number of retail agencies in the U.S. remains relatively constant. There has been all kinds of acquisition activity in the last two years, with about 1,000 agencies acquired each year. Yet, if I look back in history, in 2000, there were 42,000 retail agencies in the U.S. By 2010, the number dipped to 38,000. But by 2022, it's back to 40,000. So, while there were 1,000 agencies acquired every year in the last number of years, more than 1,000 agencies are being launched every year.
Now, to your point about all the aggregators out there, I’ve been blown away by how fast some of them have grown. Some came out of nowhere. There are many stories where, five years ago, a company was valued at $50 million, and now they are valued at $400 million.
On the one hand, these aggregators are snapping up agencies left and right. On the other hand, there's still lots of new activity going on with small agencies. And if you look at the 40,000 to 42,000 that are out there now, most of them are still small. A third of them are still less than $150,000 in revenue – literally a mom and pop around the kitchen table, and that's their living. I think around 60% are less than $500,000 in agency revenue.
There are still lots of small, independent agencies out there, and that makes for an interesting environment.
Insurance Thought Leadership:
I hadn't really thought about all the new agencies sort of filling in for the others that have disappeared because they were acquired.
Does the aggregator model work? In theory, it does, but I certainly have covered some rollups over the years that have not done well.
Mark Breading:
I think we're going to have the answer to that question in the next two or three years. Over the last, say, five years, the aggregators have been very active in acquisitions. In many cases, they let those agencies continue to run independently. But if the aggregators are going to be successful going forward, they have to start to think enterprise, right? How do we optimize our technology, our people management, our partnerships and our relationships?
I can't imagine how they could continue to grow and be successful running hundreds of little agencies.
The aggregators are right at that stage where they need to think about broader platforms and enterprise strategies. Some of them have started to roll up the little brands into the mother brand, but others have left those companies to still just do their own thing.
Insurance Thought Leadership:
That's always the tension. I don't know if I ever sent you a copy, but Chunka Mui and I wrote a book called “Billion Dollar Lessons” that we published in 2008, based on extensive research into 2,500 business failures, and one of the seven major patterns of failure we identified was rollups. They look great for a while, and then, as you say, there comes that point where you either have to start doing something differently or you aren't going to get the value out of the acquisitions. But once you start doing things differently, you can screw up the secret sauce that was making these businesses successful in the first place.
Mark Breading:
There are certainly acquisitions where the aggregators are acquiring agencies of reasonable size, and they're more corporate, so they fit better into the enterprise. But if you're buying a local agency that has 10 employees or 20 employees, and they just serve that local community, it's hard to all of a sudden make that agency part of this big corporate enterprise. If you start telling them, Here's how you have to do business, and we're going to change your brand, it's hard to keep people. They liked working local and for that local agency.
A big challenge for a lot of these aggregators is, How do you retain the talent, keeping not just the producers but the customer service reps and others who are involved in that agency?
Insurance Thought Leadership:
What do you think interest rates will do? It's one thing to be buying up agencies when money is essentially free, but when money is now costing you 6%, or whatever the right number is, that theoretically changes the dynamics some.
Mark Breading:
Yes, it does. We’ve seen that play out a little bit in the insurtech space, but there were still almost 1,000 agency acquisitions last year, and interest rates were higher toward the end of last year than they are now. The pace of acquisitions may slow a little bit, but it seems they’ll continue because the business model requires aggregators to keep buying, at least for a while.
Insurance Thought Leadership:
What other trends are you seeing?
Mark Breading:
I’m seeing a couple of other big trends. One is that the MGA [managing general agency] model is expanding rapidly. There are over 1,000 MGAs in the U.S. now, and we've tracked something like 125 startup insurtech MGAs. In the last few years, we’ve looked at their business models, and about 60% start out as what we have called line-focused or segment-focused. Some might focus only on cyber or
perhaps flood or some other specific peril or say we're just going after the Hispanic segment in the Southwest. As these MGAs grow, of course, they'll either sell or expand.
All these new MGAs are digital natives, so they're investing in tech. If you go back 10 to 20 years, MGAs never wanted to spend a nickel on technology. They relied on their risk expertise in specific areas and on their relationships downstream with independent agencies as well as upstream with underwriting companies. Now they have to be very sophisticated digitally.
The other trend is that there's a lot of activity in new partnerships. Every distributor is trying to figure out how to reach their preferred market segment, so they’re trying to find carriers that want to write the kind of business they want to sell and to leverage the relationships they have with businesses and individuals.
Maybe an agency never worked with an MGA or a wholesaler before, but now they're partnering. Or maybe the agency is expanding their panel of carriers to whom they submit business to add the same capability from the carrier side.
Should they launch their own MGA or work with the wholesalers? Should they do embedded insurance to reach affinity groups?
I see a lot of really interesting activity going on with partnership strategies and new partnerships.
Insurance Thought Leadership:
Have you seen a particularly good example of a partnership?
Mark Breading:
Some are really interesting to watch to see how they develop, such as what Amazon has done with their Marketplace. They are connected with millions of small businesses and are offering professional liability insurance or workers’ comp or whatever via a partnership with Marsh, which is then connected into Hiscox and a number of others. The jury is still out on whether they’ll succeed.
In the workers’ comp space, many are starting to partner with payroll providers, because payroll providers tend to already have a portal into businesses.
Embedded insurance is a whole other dimension, as well.
Insurance Thought Leadership:
The Amazon deal will be fascinating to watch. The potential is huge, just given the reach of Amazon, but, yes, they have to get it right. Operating at their sort of scale, you can go wrong in a big way pretty quickly.
You mention embedded insurance. I have been a big fan but have recently cooled a bit on it because I haven't seen much exciting. What are you seeing?
Mark Breading:
Yeah, I think it's an important trend, but it has been overhyped, for sure.
Part of the issue is that people have different definitions of what they consider embedded insurance Root announced a partnership with NASCAR as an embedded insurance proposition. But it's not. It's just an affinity relationship.
In my view. If you're really talking about embedded insurance, you're talking about the insurance as being almost invisible at the point of service. It's a quick “yes,” “click this” or make a couple of choices and you’ve got insurance, just like travel insurance has always been.
That's starting to happen in personal auto. Obviously, the Teslas of the world are leading, but other OEMs are also doing it. There is still not a huge take up, though. Most personal auto insurance is still sold through agents, despite all the digital options.
There are areas like warranty and travel, where it's always been. Perhaps embedded insurance makes sense for gig workers and on-demand insurance. But I don't think there's going to be much at all in the whole commercial space, outside of maybe for micro businesses. With business with employees and property and vehicles and liability and so on, I just don't see how you're going to make insurance more invisible. You need advice.
McKinsey had a report a couple of years ago that said that, by 2030, 30% of all insurance is going to be embedded. Perhaps they'll prove me wrong, but I don't think we're going to be there.
Insurance Thought Leadership:
Yeah, 30% sounds like one of those made-up numbers.
Mark Breading:
I'm with you.
Insurance Thought Leadership:
That's really it. That's the sort of overview I was hoping for. Are there any things you're seeing that you think are relevant that I didn't ask you about?
Mark Breading:
The only other thing is that there's a lot of technology activity going on to improve the whole transaction flow between agents and carriers. Everybody is upping their game digitally. A lot of the research we've done has been trying to help people understand: What do agencies want? What are carriers building? And how do we bring them together better so they can everybody’s whole game for the entire ecosystem?
Insurance Thought Leadership:
A worthy goal.
Mark, thanks so much for your time and expertise.
About Mark Breading, Senior Partner, ReSource Pro Consulting
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Mark Breading is known for his insights on the future of the insurance industry and innovative uses of technology. Mark leverages his background in strategy, marketing, and technology to consult with insurers and technology companies on forward thinking strategies for success in the digital age, where his inventive methodologies, fresh ideas, creative conceptualizations, and ability to incorporate InsurTech and transformational tech in business strategies is unparalleled. His thought leadership in the areas of distribution strategies, InsurTech, transformational technologies, and digital strategies has earned him a ranking as a "Top Global Influencer in InsurTech" by InsurTech News. Mark spent 25 years with IBM, where he co-developed IBM’s Account Based Marketing program and led the global project office to implement ABM across all industry verticals worldwide. Mark was instrumental in the success of Strategy Meets Action from the early startup phase through its acquisition by ReSource Pro in 2020. |
