’The sentence we hear most often is ‘this world is not mine anymore’,’ says chief executive

According to Deloitte’s 2024 Insurance M&A Outlook report, broker acquisition opportunities are only set to grow over the course of this year.

Published in December 2023, the professional services firm stated that the broking market was set to stay competitive in 2024, with many private equity investors likely to continue aggregating smaller firms.

The report also predicted that larger brokers would likely look at where they can consolidate and expand their footprint.

This outlook followed a very strong year for insurance M&A in 2023, especially across the UK and Ireland.

Figures by FTI Consulting, published on 25 March 2024, showed that the number of M&A transactions in this territory surged from 177 in 2022 to 232 in 2023 – a 31% increase.

So, what is driving brokers to sell their businesses? According to Gilles Normand, chief executive of broker Academy Insurance, there are “several layers of the cake” to explain why this is increasingly happening.

For example, the requirement to deal with a range of different regulations, as well as the need to become more digitised to stay competitive.

“The sentence we hear most often is ‘this world is not mine anymore’,” Normand said.

“[Brokers say] it’s not the job they started [and that] they don’t recognise this job anymore.”

Regulation impact

Normand explained that regulation was a key driver for smaller brokers being sold because it had become “very complicated”.

Several rules have been introduced by the FCA over the last few years, including the general insurance pricing reform.

Introduced in January 2022, the reform aims to protect consumers by abolishing price walking, preventing insurers from offering cheaper policies to new customers while increasing prices for existing policyholders.

And, in July 2023, the FCA implemented its Consumer Duty regulation, which sets out updated regulations that firms must follow.

Essentially, this requires insurance firms to review their products and services against a new standard of fairness.

“One trigger which is always coming back to the beginning of the discussion is the regulation,” Normand said.

“It’s the hardening of the regulation – the price walking and treating customers fairly are the two cherries on the cakes now – it’s becoming very complicated.”

In trade body Biba’s 2024 manifesto, which was published in January, the association cited research indicating that insurance broker regulation had become a “disproportionate burden” and that current methods of regulatory reporting had a resource and cost impact.

Richard Beaven, chief operating officer at Academy, explained that regulatory rules can be hard to understand due to them being a “turgid read”, meaning that firms were looking at hiring consultants to help them with their compliance – driving up costs as a result.

“It’s hard to understand if you are suddenly having to learn the ins and outs and back to front of Consumer Duty, [for example],” he said.

“It’s a very turgid read, it is very hard to understand – then [you] might have to go and start buying people in to give you compliance help and support and that is very expensive.”

Stephen Ross, head of UK and European M&A at Brown and Brown Europe, added that regulation may be impacting smaller brokers more as they may not have all the processes needed to deal with compliance in-house.

“Regulation is always a driver [to sell], particularly for smaller businesses,” he said.

“[They] probably do not have the size and scale to be able to adequately deal with the regulatory burdens.”

Digital driver

The increasing need to become more digital has been just as key in making more brokers want to sell.

With technology such as artificial intelligence (AI) on the rise and the subsequent impact of the Covid-19 pandemic, the insurance industry has naturally started to become more digitised.

Digital processes are now being used in a range of areas, such as remote home inspection for quotes and claims, fraud detection, client verification, chatbots in customer support and improving scheme underwriting.

“Customers want digital channels, as well as human channels – all of that is complex and difficult to do,” Beaven said.

He felt that the owners of smaller brokers did not initially create their firms with a view of “this is a technology thing”.

He added: “They started out with [the view of] ‘I know the market and I know a few insurers’ – yet the world has moved to this very connected, digital thing.

“Customers may not be happy that [brokers] do 9am to 5pm days and that they can’t talk to them at other times as they haven’t got a digital way of talking to them.”

And with some owners of smaller brokers approaching retirement, they may feel the need to sell amid all these increased demands.

“Part of [selling] is driven by where that broker is in their own career development and where the business is in that lifecycle,” Ross said.

“So, there are still a number of businesses that are owned by people who are thinking about entering retirement, so that’s a big driver.”

Normand added that some owners may be tired, hence the decision to want to sell their firm.

“They may have set it up in the late 80s or early 90s – it’s been 25 years and they are exhausted,” he said.