Moody sees increased market activity for brokers in 2018
Moody’s Investors Service has reported that re/insurance brokers have a stable 2018 outlook, crediting high product demand, capital requirements, significant variable costs, and good profit margins and cash flows for the sector’s health.
Brokers in the U.S will benefit in particular, due to steady economic growth, rising P&C re/insurance rates, and a lower 21 percent corporate tax rate (reduced from 35 percent), which will likely boost net profits and operating cash flows, and see brokers exceed the 4 percent median organic growth of 2016-17.
Globally, Moody’s also expects brokers to generate organic revenue growth in the low-to-mid-single digits in 2018, with continued steady demand for their products and services.
One notable factor in Moody’s report is continued investments in technology by leading brokers, which is driving efficiency, analytics, and innovation in the industry, although many brokers still operate inefficient legacy systems that lack real time data.
Moody’s also reflects the modest capital requirements of most brokers in their report, noting that brokers generally rely on good data, analytics, and pipeline management tools to attract and retain clients, the costs of which typically only amount to a few percentage points of revenue.
Moreover, they use variable cost structures, do not assume underwriting risk, and do not require fixed assets, which are all factors that support healthy profit margins and cash flows, with EBITDA (earnings before interest, taxes, depreciation, and amortization) margins expected to remain in the mid-20s for public and private brokers over 2018.
Additional growth factors include pipeline management, compensation schemes, and producer training and mentoring programs, although brokers tend to rely on these only when organic growth is unusually low.
Moody’s notes that global GDP and pricing trends will mostly be relevant for larger brokers like Marsh & McLennan, Aon, and Willis Towers Watson, as the small to midsized brokers it rates tend to produce most of their business in the U.S.
The report notes that this stable sector outlook could be negatively impacted by several risks, including economic downturn, sharp rises in borrowing costs for leveraged firms, and widespread regulatory or legal challenges.
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