Insurance Broking Whitepaper

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Insurance Broking Whitepaper


Contents

Contents ...................................................................................................................................................................................................... 1

Insurance Brokers in the UK ................................................................................................................................................................. 2

Baby Boomers ............................................................................................................................................................................................ 2

Industry Profile .......................................................................................................................................................................................... 3

Industry size ............................................................................................................................................................................................... 3

Industry performance ............................................................................................................................................................................. 3

Industry trends .......................................................................................................................................................................................... 5

Industry forecast ....................................................................................................................................................................................... 6

Emerging Business Risks ....................................................................................................................................................................... 7

Exit Strategies ............................................................................................................................................................................................ 9

Business Succession & Exit Planning .............................................................................................................................................. 10

Employee Share Ownership Plans as a Business Succession Tool ....................................................................................... 11

Continuity .................................................................................................................................................................................................. 12

Employee Incentive ............................................................................................................................................................................... 12

Tax Benefits .............................................................................................................................................................................................. 12

A Strategic Approach to Remuneration ........................................................................................................................................ 12

Summary .................................................................................................................................................................................................. 13

Bibliography ............................................................................................................................................................................................ 14


Insurance Brokers in the UK

The insurance brokerage industry is a fragmented one, with many insurance brokers competing to offer the

most attractive packages and services.

The UK is one of the leading countries for international traded insurance and reinsurance. It is the only country

where the World's 20 largest insurers have set up offices, and this acts as driving factor for the market. The

increase in demand for accidental insurance, vehicle insurance, and medical insurance are further driving the

market growth.

Brokers – What do they do?

(Source: Wholesale Insurance Broker Market Study; Financial Conduct Authority, February 2019)

Baby Boomers

There are an estimated 12 million Baby Boomers in the UK, and right now they are between the ages of 54-74

– that’s about 1/6th of the population.

In the UK, business owning Boomers will be disbursing half of the nation’s wealth as they retire. Most of these

entrepreneurs do not have a succession plan. This is especially alarming as by 2020, most will pass the official

retirement age of 65.

In 2013, the State of Owners Readiness Survey conducted by the Exit Planning Institute indicated that 49%

report having no transition plan at all and a further 34% report having a plan that was neither documented nor

communicated.

Most business owners depend on their business to fund their retirement. However, our blog ‘My business is

my pension – oops’ shows that, from research, “less than half of business owners successfully extract the value

of their business upon retirement.”

In our experience, we have come to realise that those who neglect to plan an exit until the last minute are

seldom successful and that rushed decisions are usually poor decisions.

Data and

analytics

services

Consultancy

Services

Designing new

products

Helping insurers

enter new

markets

Claims

processing

Risk

management/

mitigation

Placement

Non-placement

consultancy

Negotiator

on price/

coverage

Broker

Underwriting

through own-

MGAs/ facilities

Selling to

underwriters

Selling to

policyholders

and

intermediaries


Industry Profile

Industry size

Globally, the insurance brokerage market is expected to grow by more than $19 billion between 2020 and

2024. Some of the most established companies have been in business for more than a century, but newer

companies are still holding their own.

The London Insurance Market (LIM) is one of the largest global centres for placing and underwriting large-

scale, complex commercial and specialty risk. In 2017, it controlled approximately £60bn in gross written

premium (GWP). (Wholesale Insurance Broker Market Study; Financial Conduct Authority, February 2019)

London remains the largest global hub for commercial and specialty risk insurance. Direct contribution of an

estimated £12bn to UK GDP, and a further £29.9bn indirectly. The UK domestic insurance market is the third

largest in the world, and in 2013 the sector employed 48,000 people. (Lloyds Bank, “The UK Insurance Broker

Market Report”)

Industry performance

According to the IBISWorld Industry Report, 2015-2020, average industry growth has been 1.2% per annum.

Smaller brokers often work on the slimmest of margins and, in the changing environment, it is becoming

harder to stay afloat. Mid-tier firms benefit from economies of scale as the diagram below shows in their

performance between 2012 and 2016:

(Source: FCA Analysis of broker data request.)

Mergers and acquisitions are common and are causing the industry to gradually become more concentrated.

Industry giants are acquiring smaller business to expand their global presence, but there have also been some

mergers between large corporations to consolidate their market shares.

Large firms

(average GWP above £1.5Bn)

Mid-size firms

(average GWP above £250M)

Small firms

(average GWP below £250M)

Revenue/GWP Cost/GWP Profit/GWP


Changes in technology and customer behaviour, particularly in the micro-SME segment, are leading to rapid

commoditisation of the lower end of the market. This commoditisation is being accelerated by investment in a

new entrant to the market, Insurtech.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

200

190

180

170

160

150

140

130

120

110

100

90

80

(Source: Business Population for the UK and Regions 2017, Department for Business, Energy & Industrial Strategy, 30 November 2017)

200

Medium Employers

Small Employers

Large Employers

126

123

101

Small (10-49) Small (50-249) Large (250+) Base year 2000=100


Industry trends

According to a trends report from WNS, the industry is being lead by brokers who act on:

• Investment in digital technologies

• Facilitating risk leadership

• Changing the role of advisors

• Managing regulatory change

• Understanding Data Management

Investment in Digital Technologies

As digital technologies evolve, insurance broking firms are finding new ways to optimize processes, reduce

costs and most importantly connect with their customers. Brokers are continuing to boost investments in

Artificial Intelligence (AI), automation and big data while expanding the use of mobile devices.

Facilitating Risk Leadership

From consumer lifestyle alteration to climate change, disruptions are leading to stark changes in the way

people buy and use insurance. Companies need to build meaningful relationships by radically changing the

customer’s approach towards risks.

As more customers are empowered to effectively handle standardised risks, there is tremendous potential and

opportunities for insurance brokers in the area of emerging risks. Insurance brokers are thus becoming risk

facilitation leaders to address the need for profitability. Innovative client service models now include the shift

to automated underwriting.

Changing the Role of Advisors

Technology is providing personalised offers that are increasingly more accurate than the ones recommended

by the most experienced brokers. In addition, digital interventions and automation are ensuring reduced

intermediary commissions and fees for customers. It also means expanding consultancy work with

underwriters and others in the industry to diversify income sources.

Managing Regulatory Change

Even as insurance broking firms leverage advanced technologies to deliver greater value at reduced costs, the

dynamic nature of regulatory and compliance requirements creates significant challenges. Over the last five

years, the broking channel has seen dynamic changes in the regulatory landscape in the areas of data and

privacy with General Data Protection Regulation (GDPR), sales standards, market conduct, Solvency II, fraud,

and third-party risk management. While Brexit’s long-term impact on insurers doing business in Europe is still

uncertain, many companies have already taken steps to adapt to a post-Brexit scenario. Broking firms are

positioning regulatory and compliance risk management programs as competitive differentiators of agility.

Understand Data Management

“The Internet of Things” (IoT) is already generating significant volumes of client data, and broker systems are

getting ready to innovate and provide additional value-added services through advanced data analysis and

management. For insurance brokers, this calls for better knowledge and understanding of IoT and its impact

on risk handling. Sophisticated data analytical tools can help brokers glean customer footprint data and

develop a competitive edge through superior sales and market segmentation strategies, and improved

underwriting and claims operations.


Industry forecast

Insurance markets in developed countries are becoming saturated, but there are still many growth

opportunities in developing countries such as India and China. Despite approaching a saturation point, North

America is expected to be a source of growth for the market over the next few years, though at a slower rate

than APAC, MEA, and South America.

According to the market research report by Global Information Inc. the UK Insurance Brokerage market is

expected to surpass $19.9 billion by 2024. The steady growth rate can be attributed to the increase in

opportunities for healthcare insurance, accidental insurance, and many others. Also, the rise of the small and

medium enterprises (SME) in the country is boosting the demand for insurance products.

The competitive landscape is still very active as the diagram below shows.

Insurance brokers are being

forced to re-think their existing

services and offerings while

simultaneously evolving from

their role as experts and trusted

advisors who predict and

mitigate risks. Global insurers

are confident in business growth

over the next 3 years despite a

widespread recognition that

they must change from within,

embrace culture change,

technology transformation and

greater customer focus. (KPMG

CEO Outlook Report, 2019).

Market Concentration

Consolidated – Market dominated by 1-5 major players

European Insurance Brokerage Market

Fragmented – Highly competitive market without dominant players

Marsh & McLennan Co.

Willis Towers Watson PLc

AON PLc

Arthur J. Gallagher & Co.

BGL Group

Source: Mordor Intelligence

Major Players


Emerging Business Risks

The following challenges will see the scope of the role of Insurance Brokers start to shift to meet new market dynamics:

• Brexit uncertainty

• The rise of technology

• Self-insurance and commoditisation

• New entrants and M&A activity

The Uncertainty Surrounding Brexit

Brexit might be considered a risk for some but given London’s historical reputation and specialist skills, it is unlikely to be

affected by the withdrawal from the EU, at least for larger, more complex risks. Brokers will be forced to implement

contingency plans to mitigate risk should we lose trading rights between the EU and the UK. This period of uncertainty will

demand that brokers work to strengthen client relationships and add value to their service by helping clients to map out

their dependence on EU markets and examining alternatives.

The Rise of Artificial Intelligence

Robots may not have replaced brokers thus far, but according to data from the CII (Chartered Insurance Institute), 40

percent of account executives at broker level think their jobs are at risk from artificial intelligence (AI) and technological

developments. However, if leveraged by insurance brokers in the right way, this cutting-edge technology also offers the

opportunity to free up their time and allow for more focus on personalised client management services.

Considering the role of an insurance broker is to assess clients’ coverage needs in order to negotiate the best terms and

pricing options with insurers, access to these answers, at the click of a button, could help brokers to revolutionise the client

service by identifying and mitigating risks instantaneously. This sentiment was echoed in a recent study by Accenture, who

found that 79 percent of insurance executives agreed that AI will revolutionise the way they interact with customers.


Self-Insurance and Commoditisation

One of the major challenges for the UK Insurance Brokerage market is the direct purchase of insurance policies by

customers. Developments in technology, such as smartphones and the Internet, leads to direct sales of insurance policies.

With a growing number of insurance sales taking place online, 2018 saw brokers grapple with the rise of self-insurance and

online aggregator sites where consumers can compare insurance premiums and switch from one company to another

without the use of a broker. Keeping costs to a minimum through forward planning, insurance brokers can still contend

despite not being the cheapest. Further, brokers should focus their efforts on highlighting the distinguishing advantages of

their personalised client service to attract and retain a steady volume of policyholders.

New Entrants and M&A Activity

According to a report from Startupbootcamp, Insurtech and PwC, there are currently more than 1,300 start-ups from

across the world focusing on the insurance industry. In 2019, the trend for new technology entrants (Insurtech) to the

market continues in line with the rise in demand for digital insurance platforms that deliver seamless, consistent customer

experiences. On the surface, the surge in innovative competitors doesn’t look good for insurance brokers. However, rather

than seeing new start-ups as a threat, brokers should be open to partnerships and integration and embrace the innovation

that these technology-lead companies can offer.

The evolving regulatory and competitive landscape mean that scale is becoming increasingly important and national

brokers are expected to remain acquisitive, even though the rate of M&A activity has been dropping, as the London 100

report shows in the diagram below.

20%

42%

4%

Please indicate any M&A activity to your company is planning

Percentage of respondents

2014 survey

2013 survey

Source: Towers Watson

Merger

51%

Divestment

51%

Acquisition

51%


Exit Strategies

According to the Mazars 2019 report, “many brokers feel that consolidation levels and multiples are high, it is

predicted that these multiples will remain stable and the majority of brokers will consider acquiring in the next

12 months. It is also accepted thinking that external money (e.g. PE investment) can be a positive introduction

for a broking business”.

(Source: Mazars Insurance M&A Broker Outlook 2019)

Consolidators continued to acquire, and market consolidators continued their strategic acquisition through

2019. Nearly 40% of all acquisitions were performed by a “consolidator” in 2018 and were subject to post-

acquisition integration into the investor’s portfolio.

The three types of exit strategies most commonly exercised in Insurance Brokerage are: Liquidate, Outside

buyer and Sell to employees (not often considered).

According to Aldrich, "The objective of an exit strategy is really determined by the needs of the exiting owner.

The objective should be aligned with exiting owner’s goals and long-term goals of the business. It is important

to create a plan that will not disrupt the balance sheet of the business so ongoing work can continue to be

funded." The key questions should be:

• When is the owner(s) looking to exit the business?

• Are there key employees capable of taking over the business and do they have the capital required for

the transition?

• What is the financial condition of the business and is the owner(s) dependent on the equity in the

business for retirement?

• What are the future growth opportunities for the company?

• Is the owner(s) willing to accept the terms of the exit? (Aldrich, 2015)

The diagram below is one Succession Plus uses with clients when helping them design an appropriate Business

Succession & Exit Plan.

Co

mp

lexi

ty a

nd

eff

ort

Potential sale price/value

IPO listing

Strategic sale & sale to listed co.

Family and friends

Sell to database only

Sell to other shareholders

Partial sale

Employee share plan

Internal sale or management buy-out

Trade sale

Private equity/venture capital


Business Succession & Exit Planning

Succession Plus UK runs a customised advisory programme over a period of 12 to 24 months. During the

bespoke programme, an accredited advisor project manages the work to review strategic exit options and

advise the most appropriate strategy given the client’s time frame and financial position. It’s not just about the

business, the business owner is an important factor in the process and this is a key differentiator for

Succession Plus UK.

BUSINESS

SUCCESSION

AND EXIT

PLAN

Stage One:

Identify

Value

STEP 1: Goals and Outcomes

STEP 2: Fact Find

STEP 3: Stage One Report – INSIGHTS

Stage Two: Protect

Value

STEP 4: Financial Planning

STEP 5: Unplanned Events

STEP 6: De-risking

Stage Three:

Maximise

Value

STEP 7: Exit Options

STEP 8: Strategic Planning Business Model

STEP 9: Strategic Financials

STEP 10: Systems and Procedures

STEP 11: Marketing and Sales

STEP 12: Corporate Governance

STEP 13: Ownership Mindset

STEP 14: Peak Performance

STEP 15: Management Succession

Stage Four: Extract

Value

STEP 16: Tax Planning

STEP 17: Documentation

STEP 18: Liquidity Event

Stage Five: Manage

Value

STEP 19: Ongoing Investment Planning

STEP 20: Asset Protection

STEP 21: Estate Planning


Employee Share Ownership Plans as a Business

Succession Tool

In our book, Build It, we explore the reasons why Employee Share Ownership Plans (ESOPs) are very popular in

the United States, UK and Europe. ESOPs benefit private businesses by:

The myth that business ownership is automatically diluted the moment a company creates an ESOP is just that,

a myth. ESOP members are involved in management decisions and strategies to grow market share however,

they do not directly manage business operations or oversee the day-to-day running of a business.

Given the right circumstances, an ESOP can be highly beneficial. There are a number of options in the UK,

including Employee Ownership Trusts (“EOT” - The “John Lewis” effect)**. This is especially true for businesses

reliant on a knowledge-based skilled workforce such as modern day Insurance Brokers.

Funding an exit

Delivering improvements

in financial performance

Achieving business continuity

after the owners’ exit

Allowing tax effective

transfer of ownership


Some advantages of establishing an ESOP are having an effective incentive plan to retain key employees and

the potential to enhance the financial wherewithal of the business.

Continuity

According to the National Centre of Employee Ownership (NCEO), many closely held companies have no plans

or incomplete plans for business continuity after the departure or retirement of the founder or major

shareholder (Wrixon, 2005). This is a notable risk for the business if an incident happens to the owner or key

person. An ESOP solves this problem as it provides a platform for shares to be readily purchased from

controlling shareholders or owners as part of a business continuity plan. Furthermore, if there is liquidity or

debt capacity in the ESOP to purchase the shares of a major shareholder(s), the adverse financial impact to the

company is minimised.

Employee Incentive

Our book, ‘Build It’, details how ESOPs encourage employees to think and act as business owners. As our blog

‘ESOPs – An Employee Retention Strategy’ details, ESOPs are a significant incentive for employees to stay

within the business and display peak performance. The retention of key employees is also important for

business continuity as it ensures that customer support and projects are completed and properly staffed with

appropriate skills. Furthermore, staff retention is imperative due to the on-going skills shortages and constant

innovations inherent in this industry which results in labour shortages being a common occurrence.

Additionally, this incentive aligns the company’s goals with employees’ interests which will result in higher

profits and benefit major shareholders within the company as well as maximising the value of your business.

The ESOP is especially favourable for companies whose rapid growth has required the reinvestment of profits,

resulting in a shortage of assets available to reward employees. However, ESOPs are not an inferior option to

wages and bonus systems, as it is an effective remuneration strategy for other reasons including it being self-

funded and that it involves equity which exposes employees to the benefits of capital gains on the value of the

company.

Tax Benefits

Businesses owners can considerably reduce their tax liability and increase net worth by using ESOP’s. By selling

to an EOT, owners are able to extract cash, with significant personal tax benefits. An ESOP’s earnings can also

be tax deferred – participants do not recognise taxable income until they receive benefits in the form of

“vested” stock or cash, when they leave the company. (Nicholson & West, Build It, 2020)

A Strategic Approach to Remuneration

Offering Employee Ownership (EO) incentives through ESOP’s, instead of providing higher salaries, would also

promote a business’ cash flow and thus, overall financial position.

Employees in Employee Ownership Trust (EOT) companies tend to perform 17% more effectively than those

employees at traditionally owned companies according to the Employee Ownership Association. Enhanced

employee motivation and work morale as well as a reduction in employee turnover rates occur in EOT

companies, saving the costs associated with resignation and recruitment. EOT members are involved in

management decisions and strategies to grow market share however, they do not directly manage business

operations or oversee the day-to-day running of a business. Hence, EOTs not only advance employees’

financial positions, but also the companies’, resulting in higher rates of staff retention.

**Find out more about ESOPs and Employee Ownership Trusts in our white paper “Building Value with

Employee Ownership” at SuccessionPlus.co.uk.

https://successionplus.co.uk/employee-share-schemes/

https://successionplus.co.uk/employee-share-schemes/


Summary

The UK’s Baby Boomer entrepreneurs are rapidly

reaching retirement age without a succession plan in

place while expecting to have a secure retirement.

Most Baby Boomers will have turned 65 by 2020.

Insurance Brokers have the opportunity to build

value through innovation in service delivery, long

term recurring income and automation. De-risking

with employee engagement and investment in

training and skills adds to the attractiveness to

potential buyers, investors and employees alike.

It is never too early to plan your Business Succession

& Exit – leaving it to the last minute tends to

produce poor results in our experience.

ESOPs, which carry a range of advantages including

staff retention, improved productivity and

profitability and tax benefits, could be the suitable

succession plan for your business. Additionally, key

advantages of establishing an ESOP in view of

mitigating risks include business continuity, staff

retention and the potential to enhance the financial

wherewithal of the business.


Bibliography

Lloyds Bank “The UK Insurance Broker Market Report” sourced

https://resources.lloydsbank.com/WorkArea/DownloadAsset.aspx?id=4294970200

“Top Insurance Brokers Leading the Global Market in 2020”; Technavio market research report

“5 Trends in Insurance Broking -- A WNS Perspective”; sourced:

https://www.wns.com/insights/articles/articledetail/725/5-trends-in-insurance-broking

“UK Insurance Brokerage Market - Forecast (2020 - 2025)” - Market Research Report by Global Information Inc.

sourced https://www.giiresearch.com/report/ina850080-uk-insurance-brokerage-market-by-offering-type.html

IBISWorld Industry report 2015-2020

KPMG CEO Outlook Report, 2019

“The Future of Commercial Insurance Broking”; CII Research Report December 2017

Global Insurance Industry Insights - An in-depth perspective; McKinsey Global Insurance Pools—seventh

edition, 2017

Optimising opportunity in a dynamic environment (The UK insurance broker market); London 100 White paper

in association with Lloyds Bank Plc

Insurance Broker M&A Outlook 2019; Mazars.

Wholesale Insurance Broker Market Study; Financial Conduct Authority February 2019

Europe insurance brokerage market | growth, trends, and forecast (2020-2025) sourced:

https://www.mordorintelligence.com/industry-reports/europe-insurance-brokerage-market

Emerging challenges for insurance brokers in 2019; sourced: https://heatrecruitment.co.uk/blog/emerging-

challenges-for-insurance-brokers-in-2019/

“Enhancing business insights using data analytics and AI”; sourced https://www.accenture.com/gb-

en/insights/strategy/insurance-intelligent-broker

Startupbootcamp Insurtech and PwC 2018 Trend Report: How Insurtech is breaking boundaries and moving

beyond insurance; sourced: https://www.startupbootcamp.org/blog/2018/07/insurtech-breaking-boundaries-

moving-beyond-insurance/

https://www.wns.com/insights/articles/articledetail/725/5-trends-in-insurance-broking


Prepared by:

Succession Plus UK

International House

24 Holborn Viaduct

London EC1A 2BN

CONTACT US

P: 020 8088 7857

E: [email protected]

W: successionplus.co.uk

Follow us:

linkedin.com/company/succession-plus-uk/

facebook.com/successionplusuk/

mailto:[email protected]

http://www.successionplus.co.uk/

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