Productivity among employee benefit brokers has decreased over the past three years.

New business per validated producer dropped 4.4% since 2012, according to new research from the Independent Insurance Agents and Brokers of America. The decline is “likely due to the significant transformation that side of the business is experiencing right now,” according to the Big I, which released its 2015 Best Practices Study this week.

Profit margins for employee benefit brokers are down as a result of investing in expensive client services, says Kevin Stipe, president of Atlanta-based management consulting firm Reagan Consulting.

“The employee benefits brokerage business is in an arms race where brokers are trying to figure out which ‘weapons systems’ — meaning value added resources — to invest in,” he says. “Brokers are competing on the basis of what client services they offer and those services are costly.

“At the same time, revenue growth has slowed, too, because benefits brokers are working so hard to educate and serve — and hopefully retain — their clients,” Stipe adds. “It is hard to grow when you are spending much of your time answering the questions of your existing clients.”

Both trends are likely to continue into the near future, he says.

This is the 23rd year of the annual study, which is accompanied by a list of “best practices” firms. Every three years, the Big I, in collaboration with Reagan Consulting, honors firms in six revenue categories for outstanding management and financial achievement.

Organic growth slowing

Overall, organic growth is slowing among independent brokers. The median organic growth of 4.4% for the third quarter of 2015 marks the slowest growth rate since late 2011, according to Reagan’s Organic Growth and Profitability quarterly survey. Brokers posted an organic growth rate of 6% for the third quarter last year.

“Organic growth is slowing — for privately owned and public brokers — because commercial property-casualty insurance rates are officially in a soft market,” Stipe says. “Profit margins tend to increase during times of strong organic growth and decrease when growth rates slow.”

Transaction activity, on the other hand, is surging. There have been 294 deals announced this year — putting “2015’s pace 28% ahead of 2014, likely leading to a record year for mergers and acquisitions,” according to Reagan.

“Merger activity is driven by a combination of enormous inflows of capital to our industry,” Stipe says. Those include:

  • Private equity investors who “are seeking good returns and have found our industry to be really attractive,” he says. “Good stable cash flow, good continued acquisition opportunity once they jump in, and relatively low risk in the industry.”
  • Technology investors “looking to disrupt the status quo,” Stipe says.
  • Aging agency owners. “The demographics of many agencies is that their owners are in their 50s and 60s, and they’ve not invested in the young talent they need to perpetuate,” he says. “So, they need an outside buyer when they approach retirement.”

The recent merger and acquisition fervor is likely to persist, Stipe says. “M&A activity will continue at this rate for the foreseeable future,” he says. “No good reason for it to slow down.” 

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