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Janet Aschkenasy

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.

Brokers

Agent and Broker Profitability Hits Milestone

Broker profitability due to contingent commissions reflects carrier profitability, with P&C lines leading.
By: | August 4, 2014 • 2 min read
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Major insurance brokers and independent insurance agents reached an earnings milestone during the first quarter of this year, according to Atlanta-based Reagan Consulting.

Profitability, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA), jumped 200 basis points to reach 29.9 percent of revenue during the first quarter of 2014 — up from 27.9 percent during the same period last year, according to producers that were surveyed.

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That is the highest margin reported in the six years since Reagan Consulting has been conducting its survey, said Kevin Stipe, president of the firm, which offers management consulting to independent agents and brokers.

The primary driver of the improvement was a 15.2 percent median jump in contingent income, Reagan reported.

The figures reflect the fact that “insurance carriers really made money last year,” which they shared with top producers in the form of contingent commissions, Stipe told Risk & Insurance®.

“Those contingency bonuses are also driven in part by agents and brokers meeting their sales goals as well as providing profitable business for the carriers,” he said.

The survey results are based on the responses of roughly 140 mid-size and large agencies and brokerage firms with median revenue of roughly $15 million. About half of the industry’s 100 largest producers participated, Reagan said.

“The economic climate is markedly better than in the 2008 and 2009 recession years.” — Tim Cunningham, managing director, OPTIS Partners

Agents and brokers surveyed were more optimistic about the future as well, projecting that organic commission and fee growth — excluding the impact of merger and acquisition activity — will be 7 percent during 2014, up from 6.1 percent projected by respondents at year-end 2013.

Commercial property and casualty growth was a major driver of performance for the third year running, Reagan said.

Other significant survey findings included:

  • Median organic growth — excluding M&As — was 6.2 percent, nearly identical to the 6.1 percent in Q1 2013.
  • Commercial property and casualty growth led the way for the third consecutive year, with a first quarter growth rate of 8.4 percent — up from last year’s 6.8 percent.
  • Benefits growth, at 5 percent, was up significantly from a 3.7 percent growth rate during the first quarter of 2013.
  • Privately held brokerages continue to grow faster than public brokerages, which reported organic growth of just 3.6 percent, on average.

“Private companies tend to grow a little bit faster organically than the public brokers which are inclined to do more acquisitions,” said Stipe.

Not every firm will necessarily see the reported levels of improvement, said Tim Cunningham, managing director with insurance M&A consulting specialist OPTIS Partners in Chicago.

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Still, most agents and brokers are experiencing revenue and profit margin growth, he agreed, noting that P&C rates are “broadly up” and, that insurance broker clients have experienced better sales and increasing payrolls.

“The economic climate is markedly better than in the 2008 and 2009 recession years,” he said.

Workers’ compensation and commercial auto insurance rates are up reflecting deteriorating loss experience, for instance.

“Coastal property capacity and rate continues to be an issue,” he said. The same is true for many property exposures in the heartland states prone to hail and tornadoes,” Cunningham said.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Insurance Industry Challenges

Insurance Asset Growth Lags

Insurance company assets-under-management growth is weak compared to other global asset management.
By: | July 23, 2014 • 3 min read
Assets

Global insurance assets under management are growing — but not nearly as much as they could be, according to the Boston Consulting Group.

One key problem, though not the only one, is that insurers tend to under-invest in information technology, securities processing and other operations integral to asset management, according to BCG.

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Insurance company assets comprise nearly 20 percent of the $68.7 trillion in total global assets under management, as recorded by BCG last year.

Insurers’ total assets under management (AUM) reached $13 trillion in 2013. Yet, their AUM growth of 7 percent in 2013 was far lower than the overall average 13 percent increase in global AUM.

The fact that global insurers have lagged behind their asset-management peers in operations and information technology capabilities is something of a Catch-22, said Achim Schwetlick, a BCG partner and managing director in New York.

“The lower growth has likely contributed to the under-investment, not the other way around,” he said.

But clearly, this is an area that needs to be addressed, he said.

Between 2012 and 2013, insurance asset managers reduced their operations and IT spending by 4 percent per unit of AUM, said Schwetlick, who is a member of BCG’s insurance practice. In contrast, the broader asset-management industry increased that spending by 3 percent.

The serious expense reductions required by the “meager years” during and after the financial crisis prevented increased investments, he said.

“Now that we’re getting into growth territory again and expense pressure has mitigated, we think this is a good time to break that pattern,” Schwetlick said.

In addition, whereas most insurers have outsourced asset management in alternative asset classes, the vast majority of insurers still manage most of their assets in-house, he said.

The newly released BCG report, entitled “Steering the Course To Growth,”also pointed to the “large proportion of fixed-income assets” held in insurance company portfolios as a reason they “did not benefit as much from the global surge in equity markets.”

Insurers’ “exposure to high-growth specialties was similarly limited,” it said.

Regulatory and Organizational Inefficiencies

That may be difficult to overcome, said Schwetlick, given regulatory constraints preventing insurance companies from investing more aggressively.

This is particularly true in the United States, he said, although even European insurers tend to have no more than 10 percent of their assets invested in equities. In the U.S., equity investment is closer to 1 percent, said Schwetlick.

Organizational impediments have helped to sustain inefficiencies related to asset management, according to the BCG report.

The inefficiencies include regional fragmentation of assets, so that the asset managers of most insurers operate in regional silos as well as asset class silos, exacerbating fragmentation and complexity.

Insurers should move to a more global model to address those issues, said Schwetlick.

“You really want to have processes that are similar across the globe,” he said, that are related to both investment management and access to information about insurance company loss exposure.

Third-Party Management Benefits

The good news, finally, is that many insurers have benefited from third-party asset management over the past several years.

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“While insurers’ asset managers have not historically focused on profitability and growth, they are tempted by the high returns on equity of third-party management,” according to the BCG report.

“Some managers have built this business to more than a third of their activity, and, in doing so, have invested and grown stronger commercially,” the report stated.

“As a result, they have achieved higher revenue margins and profits — averaging 25 basis points of revenues and 39 percent profitability, compared with 12 basis points and 26 percent, respectively, for mostly captive managers that focus predominantly on the insurer’s general account.

Leaders in this area include Allianz, AXA, and Prudential, said Schwetlick.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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Global Risk

Quantifying Supply Chain Risks

Norway ranked first, while the Dominican Republic was worst at providing favorable supply chain factors.
By: | July 15, 2014 • 2 min read
Map

Would it surprise you to learn that of 130 countries worldwide, the most favorable location for supply-chain exposures is Norway?

The Scandinavian country might not be a risk specialist’s first guess about supply chain conditions throughout the world, but that is indeed the case, said Steve Zenofsky, FM Global assistant vice president and spokesperson.

Coming in behind Norway in terms of affording favorable supply-chain factors were Switzerland and Canada. Most challenging areas for risk managers? Kyrgyzstan, Venezuela and the Dominican Republic.

The rankings are according to FM Global’s new, free online Global Resilience Index, which assesses conditions in 130 nations, and analyzes such factors as corruption, political risk, local infrastructure, risk of natural hazards, availability and price of oil, and quality of local suppliers.

George Haitsch, executive vice president and practice leader of Willis Global Solutions, said the Index is unique in offering free access to a tool that addresses factors specifically related to supply chain risk hazards.

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For its part, he said, Willis offers clients an online tool called Atlas, which allows them to track natural catastrophes worldwide in real time.

“That’s the technology we have been working on,” said Haitsch, noting that natural-disaster risk and supply-chain risk have become increasingly intertwined.

Torolf Hamm, executive director in Willis’ catastrophe risk management practice, said in a blog post earlier this year that businesses are “increasingly keen to identify which key parts of the supply chain could be affected by the same natural hazard event and what risk mitigation options are available to reduce this exposure.”

Eric Jones, assistant vice president for Business Risk Consulting at FM Global, said the “real power with this tool is getting our clients to start thinking about the risks in their supply chain from a physical risk standpoint.”

“Using the index, risk specialists can get the attention of the C-suite and increase their organizational commitment from a time and resource standpoint,” he said.

The Index is designed to permit users to search for “core resilience drivers” impacting supply-chain risks, to learn which countries have the highest and lowest scores.

In drilling down for political risk climate, Switzerland, Finland, and New Zealand, for example, ranked highest.

For natural-hazard risk management, Ireland, Portugal and Singapore ranked highest, while Costa Rica, Israel, and the United States ranked highest for fire risk management.

The tool also displays a color-coded map showing which parts of the world are most and least risky in terms of supply chain factors from 2011 through 2014.

Janet Aschkenasy is a freelance financial writer based in New York. She can be reached at riskletters@lrp.com.
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