Covid challenges to Insurer Distribution Strategy

Insurance distribution deal activity in Canada and the United States reached unimaginable highs in the fourth quarter (Q4) of 2020, according to a report by Chicago based OPTIS Partners. The investment banking and consulting firm has attributed these deal heights to “a combination of pent-up demand as we learned to live and work in a pandemic world,” as well as a rush by firms to “avoid an expected increase in capital gains tax by selling before year end”.

Speculation in Canada about a potential increase to the capital gains tax rate has been high for some time as Ottawa seeks ways to pay down a soaring deficit amid billions in spending on pandemic-relief measures. As such, OPTIS Partners expects that insurance brokerage sellers will “continue to push to close deals as a hedge against a possible increase in capital gains tax” in the early months of 2021.

There are other factors driving brokerage M&A in Canada. The COVID-19 pandemic has forced brokers to engage in digital transformation and conduct more of their business through virtual settings. Those who haven’t been able to adjust to the new business environment spawned by COVID-19, or those who simply haven’t engaged with it (either by choice or lack of means), might be looking to sell to or partner with a larger brokerage firm or network where they can gain access to those capabilities.

Buyers, on the other hand, are interested in the brokerage/agency space for its resiliency, which has been proven through tough economic times like the Great Recession and the current pandemic. Insurance distributors have been able to produce predictable and consistent revenue streams coupled with high margins, making them attractive from an investment perspective.

Canada has seen its fair share of M&A transactions over the past few years.  Hub International and BrokerLink keep making the headlines with deal after deal, and there’s been more movement towards large additional brokerage networks in Canada, like Novacord and Westland.

This heightened deal activity is having an impact on the distribution landscape in regional insurance markets. Saskatchewan Mutual Insurance Company reported that in 2012, the top 10 broker groups accounted for 32% of premium volume and in 2019 that increased to 43% premium volume with 6 broker groups owned by another broker. There has been a shift in succession planning among local brokers, with fewer independent brokerages passing down to family members, and more selling to larger broker networks

Independent brokers that join larger networks, get more leverage in the market, and they get access to new technology. By being part of a larger brokerage network, they can consolidate some of their needs together, and really enhance their customer experience.

Insurers can move alongside their brokers working together to obtain solutions that assist brokers in conducting their business easier, such as more investment in digital technology. With such a win-win situation available, it’s more than likely that insurance distribution M&A will continue to soar through 2021. Ontario Mutual Insurers are facing these broker consolidation issues and have the opportunity to review their distribution strategy to ensure premium volume and loss ratios will not be impacted negatively.  

Canadian Insurance Mutual Professionals have expertise in distribution strategy with insurers, brokerages and insurance consolidators.  We can assist in distribution reviews to ensure effective preparation against distribution disruptions.

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