As we’ve written before, we’re particularly interested in software that supports the work of insurance brokers. Brokers provide a service that we know is resilient in the current market. Customers care about having an agent that is experienced, knowledgeable, and well-connected. Fragmented work flows, rising prices, and increasing global risk are making it more difficult for brokers to do their jobs.
To better understand how technology can meet the needs of brokers, we talked to Tim Wright, former CEO of Willis International at Willis Group and Head of Corporate Risk & Broking at Willis Towers Watson. Aside from being a great conversation with decades of operational insight, this is a glimpse into the lens through which we evaluate startups and how we think startups in this space might be successful. (And, of course, if what you’re building fits the bill below, please reach out.)
AN: Why is brokerage appealing, compared to other parts of the market?
TW: P&C insurance broking is a financially simple and highly rewarding business. It consumes relatively little capital, provides strong cashflows, and has annual renewals and delivers strong margins (20-35%), making broking the most attractive and profitable part of the insurance value chain. In the US and global/specialty markets at least, it benefits from an asymmetrical balance of power vis-à-vis insurers (i.e. much greater concentration among brokers than insurers). Unsurprisingly, brokers trade publicly at high multiples and are the darling of the PE market due to their SME consolidation potential.
What are the primary functions of brokers, and what do they care about?
I think it comes down to seven outcome measures:
- Winning new clients: The flip-side of high retention rates is that it is harder to win new clients. This opportunity arises rarely, usually every three to five years for large corporate clients. With a high degree of inertia, it is necessary for either the incumbent to mess-up badly (failed renewal, unpaid claim, loss of AE, etc) and/or the new provider to differentiate (usually around innovation in the program, to mobilize more capacity, improve terms, and lower price). In a tender, or formal RFP, the average win-rate is one out of three. So, solutions that could provide brokers with a ‘secret-sauce’ to increase their win rate (or even precipitate an out-of-cycle tender) would be golden!
- Developing existing clients: This should not be underestimated. Clients tend to spread their insurance purchasing across multiple brokers, so for the largest, this is a share-of-wallet game. Development can be both upsell (e.g. getting more of their property program) or cross-sell (e.g. selling D&O to a property client). For some brokers, this is a greater source of growth than new clients, since it’s not as competitive and you don’t have to wait 3-5 years.
- Retaining existing clients: In a renewable business, this is the Achilles heel. For an individual AE, losing an account is their biggest fear. It both impacts them directly from a financial perspective and may be career-limiting. For this reason, a lot of attention is focused on retention. At Willis, for example, we had an ‘early-warning system’ to catch potential losses early. Solutions that demonstrate clear value by the broker and create real barriers to switching could be helpful here.
- Enhancing yield on premium: This is less obvious but absolutely fundamental to how brokers think. Let’s deal first with how it works at an individual client level. Most of this business is fee- rather than commission-based, which automatically lowers the yield on premium. Brokers are interested in increasing yield beyond individual client accounts, at the level of a) the overall insurer relationship and b) the overall portfolio of risks. Brokers negotiate MDI (Market Derived Income) from insurers over-and-about their commissions and fees from the clients by providing them with more business or more profitable business or providing them with data. Brokers, if they are smart, also apply an ‘underwriter’ lens to portfolios of risks they control and then decide how to package it up and offer it to the market to improve terms for clients and yield for themselves. This is something an automation software solution could help with.
- Delivering margin: Broking has traditionally been a ‘revenue-led’ business, where all the focus and power has been on generating income. Afterall, with high margins, why bother too much about cost? Compared to insurers, banks and other industries, they remain arguably immature operationally but they are catching- up. They have pursued the classic levers of streamlining, standardization, automation, offshoring, outsourcing, etc (with mixed results). To the extent that a product could help them deliver meaningful cost efficiencies, this is very helpful (but less compelling than the income-related drivers).
- Getting cash: Brokers are cashflow businesses, but getting the cash from complex transactions can be a nightmare, with 90-days not being untypical. Cash is the focus of the regulators, as brokers need to distinguish between own and client money. Failure to do so is the single biggest driver of regulatory sanction. As interest rate have risen, cashflow has become all the more important, as brokers sit on funds and can earn interest on that. Historically, when rates were high, this could account for a third or even half of the brokers’ profits!
- Increasing multiple: For private equity-owned brokers, quality-of-earnings and future growth are seen as vital for underpinning a high-end multiple. To the degree that technology could help brokers drive future growth through a ‘repeatable formula’ or new sources of income, this would obviously be very valuable (though it may be a stretch).
What data is important to brokers?
- Exposure: This is the full data set associated with the underlying risks, for which the client is the ‘golden-source’ (but there are also third party context sources).
- Pricing & Coverage: This is obviously related to the exposures, but what is the ‘price-on-line’ of the coverage (premium to exposure ratio). Clients are more concerned with which risks are covered by the policies (there are typically deductibles, exclusions and limits). The most sophisticated clients (and their brokers) think about the total cost of insurable risk as the key metric that brings these things together – premiums are the ‘currency’ of the insurance industry (not TIV).
- Transaction: In the placement process, different parts of a particular risk are offered to multiple insurance carriers, who provide responses. Only a subset of those carriers actually end up binding a risk; the brokers have realized that this ‘data exhaust’ on the placement is ‘gold-dust,’ as it tells insurers how they are behaving and how the market overall is responding to a particular risk. It should provide the broker with insight that would allow it to structure the placement way more effectively – something we may look to AI for in future.
- Losses: This is obviously the bottom-line of insurance—for an insurer, losses are the biggest driver of returns—so when pricing a risk, the combination of exposure information and loss experience determines how they price a risk. Without reliable, granular and timely loss data you are simply not in the insurance game; for the brokers, this is what allows them to ‘package’ up their portfolios per the above.
- Billing: Cash is a nightmare for syndicated placements and frequently delayed (see above) but of massive importance today, given interest rates – there will be increased attention on this over time.
We thank Tim for sharing his thoughts on this topic. We would love to talk to any innovative companies tackling this market, and thinking through the opportunity to help brokers with their business opportunity. We will be hosting a dinner with a few broker leaders in the first quarter to further this conversation, and welcome interested parties to reach out to us.