Agency owners must watch and learn about major trends when they start. Following are key trends that insurance agencies should be tracking for 2024.
Several trends are emerging in the insurtech sector.
Artificial intelligence, or AI, and machine learning, have increasingly integrated into insurtech for risk assessment, pricing, underwriting, fraud detection and customer service. In 2024, these technologies are expected to become more sophisticated, offering more personalized and accurate insurance products. Using AI, chatbots and other interactive tools, insurtechs will likely continue improving the customer experience, making insurance more accessible and understandable.
As cyber threats evolve, the demand for cyber insurance will likely grow. Insurtech companies focus on developing products that can address emerging cyber risks, such as ransomware attacks and data breaches. One method to mitigate cyber fraud is blockchain technology, which is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Blockchain is being adopted for its potential to improve transparency, reduce fraud and streamline claims processing and payment.
There is a move towards hyper-personalized insurance products and services tailored to individual needs and preferences. This personalization is often driven by data analytics and AI. In a similar fashion, on-demand insurance allows customers to instantly obtain coverage for a specific duration or activity, catering to a more flexible, modern lifestyle.
Other technologies being used to customize insurance are the internet of things (IoT) and telematics (a combination of telecommunication and computer information), which continue transforming auto and home insurance. Insurers use data from connected devices to monitor real-time risk and offer usage-based or behavior-based insurance models. Also, carriers’ use of predictive analytics to assess and mitigate risk before it occurs will likely expand, allowing for more proactive insurance models.
2. Market Conditions
A mixed bag of market conditions will continue in 2024.
Per the Council of Insurance Agents & Brokers (CIAB), the commercial lines market will generally have hard market conditions with increases in the ballpark of about 8.8%. Boosted by socio-economic uncertainty during the pandemic, rate momentum was pushed even more by high inflation. Weak loss experience and higher insurance rates led to a rebound in pricing momentum this year in both property and auto segments.
Property rates grew 20% in 2023, and commercial auto rates were 8.3% higher.
D&O liability and cyber risks experienced a sudden flattening of rate changes.
According to Fitch Ratings, workers’ compensation has posted the best underwriting profits, with an average combined loss ratio of 89% for the past five years!
Florida, Texas and California face various personal lines coverage issues. Florida has dealt with massive insurance fraud and several hurricanes. Texas has tornadoes and hailstorms, affecting new business coverage and writings. California confronted large wildfire losses and is hitting a wall of limited rate increases.
In Florida, the state-sponsored homeowner’s insurer of last resort, Citizen’s Property Insurance Corp., has greatly increased its writings. There have been major reforms signed into law in Florida in recent years. Pro-insurance laws include removing one-way attorney fees, prohibiting the assignment of benefits, and limiting policyholders to file bad faith claims against insurers. Prompt settlement of insurance claims has been the result.
Despite the high cost of homes and the significant losses due to wildfires in California, homeowners insurance costs less there than the national average. This is primarily due to the rate increase limitations from Proposition 103 (passed in 1988). Several insurers are no longer writing in the state, noting loss ratios and regulatory burdens. Farmers and State Farm have left or limited writing business in 2023 and likely in 2024, resulting in a crisis as people cannot get any coverage.
3. 2024 M&A Activity and Pricing
What has been putting a damper on some of the acquisition activity is the potential increase in federal taxes on the transaction that could occur as early as the first quarter of 2024 if President Biden has his way. See the tax section of this article. Inflation has also increased greatly, and higher interest rates are putting a damper on the number and value of transactions.Deal count is down 24% in 2023 compared to last year, according to OPTIS Partners, mainly due to the increased cost of capital.
Hub International and Broadstreet Partners recorded the most transactions in the first half of 2023, with 29 and 26, respectively. Inszone, World and Patriot Growth, followed with 22, 17 and 16 deals, respectively. Some very active in the past acquirers, PCF, Acrisure and Highstreet Partners, accounted for 75% of the decrease in the number of transactions.
There is still interest from buyers and valuations for better firms will remain strong. If interest rates continue to rise, some buyers with less strong balance sheets may be forced to the sidelines. The prices currently paid by publicly traded brokers, large regionals and agencies funded by private equity firms are still high. They will hopefully continue to be high for the valuable, desirable firms. Since the supply is dwindling, the prices may be even higher for those that remain if they fit the profiles of the key buyers today. As long as insurance agencies remain profitable, there will be buyers.
According to our discussions with key acquirers, M&A activity is expected to continue with some caveats.
According to Clark Wormer, M&A director for HUB International, “HUB has brought on over 60 excellent merger partners through 2023 and hopes to continue this in 2024!” Their current acquisitions help expand their business.
Foundation Risk Partners (FRP) began in November 2017, and they are approaching $600 million of annualized revenues by year end 2023. They do not announce their transactions but are now in the top 20 largest U.S. independent agency brokers. They made numerous acquisitions this year and will continue that trend in 2024.
FRP is looking for more add-ons and new niches to spread nationwide. They would especially like to add firms in the Pacific Northwest, Texas, the Rockies, the Southwest and New England. They are looking to continue to build existing places, including the Northeast, Southeast, the Midwest and California, where they have many acquisitions already.
Risk Strategies Co., based in Boston, closed 37 transactions in 2023, which was their biggest year. They expect to do quite a few in 2024. They look to continue to buy quality firms of scale. They are very well capitalized with excellent capital structure.
Alliant Insurance Services, headquartered in Irvine, California, is the eighth largest broker in the U.S., with 130 offices throughout the U.S. Though Alliant is viewed in the insurance distribution market as having exceptional organic growth year over year, 2023 has been a very strong year on the acquisition front, as Alliant had closed on 21 acquisitions as of October 1, 2023. Alliant will continue to seek high-quality businesses that fit well within one or more of their operations (specialty, middle market, underwriting, employee benefits or consumer operations).
Inszone Insurance, a prominent player in the insurance industry, has already completed 35 acquisitions in 2023, with 15 more in the pipeline by year-end. Their ambitious goal for 2024 is to reach between 60 to 70 acquisitions, positioning the agency for substantial growth.
Inszone’s strategy focuses on expanding into all 50 states, supporting clients with commercial and personal lines as well as employee benefits.
Arthur J. Gallagher will continue to be a good player in the acquisition field. They do not announce the number and value of their transactions. However, they are competitive and looking for great agencies throughout the country.
BroadStreet Partners, NFP, High Street, USI and the new acquirers — World, Relation, ALKEME and Patriot — are funded by private equity and venture capitalists. They continue to solicit and buy independent agencies aggressively. They all have large amounts of capital to use for transactions.
Private equity firms have been buying up agencies for investors. This makes sense because the return on investment is typically 20% to 30% plus, which is greater than most other available investments today. PE firms often still pay nine- to 11-times EBITDA for well-run agencies!
There is a broad spectrum of prices today based on the motivation and uniqueness of the seller. Common multiples of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) range between 8.0 and 11. Occasionally we may see an EBITDA multiple higher than 11 times, but that is rare. Common multiples of revenue range between 2.5 to 3.5 times revenue. Additional earnouts based on profitability and growth can add a significant amount if the targets are reached.
In some cases, the fixed price has an earnout over two years, especially since COVID. Most down payments consist of approximately 80% of the price in cash and the balance in stock. Sometimes the stock can be used for key perpetuation candidates that the seller and buyer want to ensure will remain in the agency after the sale. In this way, they feel a part of it and have some skin in the game to stay on for years after the key owners retire. We usually recommend that our sellers take the stock, as it can give them a significant additional amount of money when they sell it due to the high rate of growth these acquirers have compared to a typical independent agency. A number have been averaging 30% growth in stock value.
Smaller books are purchased at around 6.0 to 8.0 times EBITDA. However, there aren’t many books or agencies today that do not command at least two times revenues as a minimum.
4. Peer Acquisitions
There will continue to be a price differential between those who receive offers from “well-funded” buyers and those who sell internally or to local competitors. Local peer buyers and internal buyers cannot easily compete at these high prices and multiples since they usually need to pay for the transactions out of cash flow.
Some independents prefer not to sell to a more prominent, often publicly traded firm. There is often a sense of pressure to produce and write larger accounts. In addition, producers in these acquired agencies usually must write commercial lines and benefits accounts over $5,000 in commission or even more for other acquirers to get paid. On the other hand, other acquirers leave the agency alone except to provide markets, accounting, and HR support and don’t even change the seller’s name.
5. Tax Law Changes Likely
With the Democrats continuing to get bills passed with a large amount of spending, it is very doubtful that the lower tax structure of the previous administration will continue. For agency owners, this also includes whether or not capital gains will be taxed at their current low federal rate of 15% to 20% or be changed to perhaps 39.6%! What is proposed is that for over $1 million in the sale value of any assets, the capital gains rate be eliminated. Instead, a much higher ordinary income tax rate be put in place, perhaps 39.6% versus the current 34.6% rate.
Many agencies concerned about higher taxes insisted on selling in 2022 and 2023 to avoid this concern. There is also a strong possibility that state income tax rates will increase, such as in California. Personal income taxes, especially in the higher brackets, are predicted to rise substantially because of the stimulus, as well as the infrastructure and federal budget packages that were passed.
6. Group Benefits and Health Insurance
Current key trends in group benefits and group health insurance are driven by a combination of technological advancements, changing workforce demographics and expectations, regulatory changes, and the evolving healthcare landscape.
There’s a growing trend toward offering more personalized and flexible benefits packages. Employees value the ability to choose benefits that best suit their individual or family needs. Companies increasingly offer benefits that address a broader range of employee needs, such as financial wellness programs, student loan repayment assistance, or flexible working arrangements. Employers are investing more in educating their employees about the benefits available to them and how to use them effectively.
An increased focus on mental health started 10 years ago. Mental health benefits are central to group health plans. Employers recognize the importance of mental well-being in their workforce’s health and productivity.
With the rising cost of healthcare, there’s a focus on cost management strategies. This includes exploring different funding arrangements, such as self-insurance, and emphasizing cost-effective care options. The use of technology platforms for the administration of benefits makes enrollment and management more efficient and user-friendly.
The industry is looking for ways to cut costs while improving service through the use of telemedicine and digital health services.
The adoption of telemedicine has surged, partly accelerated by the COVID-19 pandemic. This trend will likely continue as it offers convenience and lower costs for employers and employees.
Another way improved services occur is with the Internet-of-Things (see Insurtech Trends), such as integrating wearable technology with healthcare. Some employers are integrating wearable health technology (like fitness trackers) into their wellness programs, encouraging healthier lifestyle choices and sometimes linking these to incentives within the benefits package.
Employers and insurers use data analytics to effectively tailor benefits programs, manage costs, and improve health outcomes. This includes analyzing health claims data to identify trends and areas for intervention.
This ties in with AI and predictive analysis as described under Insurtech Trends.
The first step is being proactive and knowing how current trends will affect the firm. Managing the agency in a way that exploits these trends will then allow the firm to succeed. Agency owners must also establish business and marketing plans to stay ahead of the competition.
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