Insurance company investment in a brokerage is a nebulous area, but if it were to be counted as an ‘acquisition’ of a brokerage, the market share of Canada’s ‘independent’ broker channel would be significantly reduced, PwC told Insurance Business.
Allan C. Buitendag, Partner and National Insurance Consulting leader at PwC, said there would likely be a much different mix between independent brokers and direct writers if insurance company investments in a brokerage actually counted as an ‘acquisition.’
“There’s a clear, flat-out acquisition of a brokerage, where another broker or company goes out and buys them, a la Western Financial,” he said. For example, Western Financial, a financial services organization owned by Desjardins - a direct writer - acquired six brokerages in 2011, as well as five additional brokerages between July 2012 and February 2013.
“Or there’s the model in which an insurer would invest in them,” said Buitendag. “Some insurers have warehousing approaches where they can provide funding (and time) to facilitate broker-to-broker acquisitions and/or succession planning. They don’t necessarily want to own it outright, but they want to put enough money into it that they control a significant block of the business and/or still have the option to outright own it later on.
“So a lot of those investments in brokerages I don’t think would count as an acquisition, per se."
Unfortunately, there’s very little publicly-available data around how much of that is going on, Buitendag said.
“I would suggest that if you counted brokerages where a particular company had a significant financial stake in them and underwrote a significant portion of the ‘independent’ broker’s business, the direct versus independent broker channel mix would look a little bit different,” he said.
The broker channel in Canada has a market share of approximately 62%, with direct writers at 38%, according to the Insurance Brokers Association of Ontario (IBAO). But if insurance company investment in brokerages counted as an ‘acquisition,’ that market share split would look higher on the direct side as the trend to invest in brokers is continuing , said Buitendag.
S&P Capital IQ data show 29 mergers and acquisition deals announced in 2011 that involve an insurance target, compared to 21 in 2010 and 12 in 2009. The vast majority of that activity was in the brokerage and managing general agent (MGA) space, with 23 brokerage and MGA targets in 2011 compared to 11 in 2010.
M&A activity in the MGA and broker space will likely continue, as insurers streamline their operations.
“Carriers that have gone down a transformational path – put in more advanced systems, streamlined their processes and consolidated their operations – are looking for a consistency across their chosen distribution channel s. Some are seeking a more direct model, while others continue to deploy more of a saddle or “hybrid” model. Regardless of the path chosen, leading companies want to increase control of their distribution channels in a competitive market,” said Buitendag.
