It was one of those situations where I needed a number, a piece of data that I remembered from years ago. I was searching through articles and books and never found it. I did, however, find an old article from 1980 written by David Hales. That name probably does not mean much to most people but David Hales founded Hales & Associates. Hales & Associates spawned a number of the agency consulting firms that are prominent today. In 1980 he wrote that there were 40,000 independent agencies.
In 2021, Progressive reports that it has appointed 35,000 agencies. Just about every independent agency represents Progressive, or so it seems to me, so their agency force is a decent proxy for the total number of agencies. For all the talk and discussion of agencies disappearing, I found David Hales' article fascinating. Thousands upon thousands of agencies have been purchased and merged, yet in 40 years, the number has only decreased by maybe 12.5%? Amazing!
I read a report this morning about a specific agency shooting for $1 billion in revenue. That is an awfully big number. $1 billion is about $9 billion in premium which is larger than about 98% of P&C carriers. Last week I read that approximately 25 different private equity firms were buying agencies. Are there really enough to go around? There definitely are not enough agencies for all the private equity firms aiming for $100 million to get even close $100 million unless someone is going to buy Marsh McLennan and a few other behemoths. After all, private equity can’t buy State Farm agents.
I was reading a report on one of the new Insurtech carriers. Backing into their stock price, their ratios show their management and maybe the market expects the carrier to capture around 75% of their line of business market. What is unsaid is the anticipation that their lines of business will expand, however, 75% is not only unlikely but for an insurance company, probably stupid. The spread of risk would cease.
Insurance premiums only increase about 4% annually, at least that has been the pace over the last 25 years. The insured world, not necessarily the world in general, is getting safer. More and more underwriters are getting their wish to insure accounts that have no claims. The downside is that if consumers have fewer claims, they do not need insurance. So, unless what is insured changes dramatically, an increased growth rate is highly unlikely.
Another interesting number is that organic growth for the most part does not exist with buyout firms and large brokers. Organic growth is occurring at old fashioned agencies that invest in people.
The net result is that for even some of these firms to succeed, they have to put other firms out of business. Two older carriers are doing this. They are writing about $10 billion net new premium annually. These two carriers are writing more, combined, than 98% of all carriers have generated in their entire existence. The industry is not growing fast enough for these two carriers to achieve that level of success without taking business from other carriers.
Agencies focusing on organic growth are doing the same, although on a smaller scale.
What seems to happen relative to insurance distribution is that buyers buy agencies with no real future. They do not invest heavily, in general, in developing organic growth. New agencies pop up and the owners are hungry. They must sell and they must take business from other agencies to succeed. It is the cycle of life.
This is why I believe agencies committed to true organic growth have so much potential. I am excited that now is a great time in the industry for those who are thinking ahead about what really needs to be insured. I am excited to work with people who are not caught up in the buyouts and think old line insurance companies are somehow going to survive without drastically catching up to 2021!
Today is a pretty good time for forward thinkers, hard workers, and people bringing true value rather than financial engineering to the table.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.