London Wholesale Broking - Thunderheads Gather After Boom Times

04/09/2023, 18:46 London wholesale broking: Thunderheads gather after boom times
London wholesale broking: Thunderheads gather after

boom times
Rachel Dalton 10 May 2023
To stay relevant, intermediaries are being forced to scale up, broaden their
suite of services and quantify their value.
Wholesalers must keep pace with accelerating modernisation in the London market and the
increasing threat of disintermediation or deselection as retailers become more sophisticated
counterparties.
The largest London wholesalers have reached significant scale after a period of explosive
growth, driven by private equity investment, hardening market conditions, an uptick in excess
and surplus business flow into London and post-pandemic economic growth.
https://www.insuranceinsider.com/article/2bn3iqhmqu5k5rw7o9dds/london-market-section/london-wholesale-broking-thunderheads-gather-after-boom-times 1/10
None of the intermediaries report wholesale revenues in isolation, but the scale of these firms
shows the increased maturity of the London market, with Ardonagh and Howden having
hundreds of millions of pounds of London wholesale broking revenues.
We have explored a range of cyclical challenges facing brokers in detail in previous coverage.
The upshot of these is that various macro-economic trends are curbing wholesalers’
opportunities for revenue growth.
The increase in the cost of debt has both slowed M&A activity and created additional strain on
cashflows for levered brokers as the price of borrowing increases.
Consolidation, driven by PE interest in the sector and fuelled by cheap debt, has been a key
mechanism for inorganic growth for some brokers. Slowing consolidation places the onus on
brokers to focus more on expansion through organic growth.
UK distribution M&A volume fell by 27% in 2022

Number of M&A transactions involving UK distribution businesses in 2021 and 2022
8 Lloyd's and
18 reinsurance
20 8
13 MGAs and
13
wholesale
100
73
Personal lines
2021 2022 Commercial lines
Source: IMAS
The other major cyclical factor is the tapering of rate increases observed since early 2021. As
pricing cools or even begins to fall, brokers’ cut of premiums shrinks.
It is also important to note London’s role as a surplus lines market means that when markets
inevitably soften, business can ebb back to domestic markets once more.
These factors, however, do not affect every wholesaler in the same way. While price increases
have tapered away in some lines and territories, such as global financial and professional lines,
others such as property – a sizeable proportion of most London wholesalers’ books – are
having a price resurgence.
In this piece, however, we turn our attention to the structural challenges that are mounting for
London’s independent wholesale and specialty brokers – and look at their attempts to face
them.
The chief structural challenges facing London wholesalers are pressures around a)
modernisation, b) disintermediation and c) ever-more-fierce competition.
None of these are new challenges – but many are reaching a meaningful pinch-point that is
forcing brokers to evolve to survive.
Modernisation/disintermediation
Modernisation demands increased tech sophistication
Scale and breadth offer the key to success
Smaller brokers without niches to suffer first
The primary existential threat to London’s wholesalers is that the modernisation of the
marketplace will bring an element of disintermediation.
Examples of this include increased use of digital placement and the rise of automation, which
reduces the need for extensive broker services.
The threat of modernisation as a disintermediating factor has long been present – indeed,
reducing the length of the value chain through technology is viewed by some evangelists as
the biggest prize on offer.
In the past decade, however, the more extreme predictions around modernisation changing the
face of the market have not materialised. Rather, a more gradual process of evolution has
played out. Over that time, client demand for a shorter value chain has been quelled by
wholesalers demonstrating their value in securing good deals or more capacity.
There are two main factors now, however, that are bringing the modernisation tipping point
closer than ever.
The first of these, in London, is the increasing focus of Lloyd’s on modernisation. Blueprint Two
is not, of course, the Corporation’s first attempt at digitising and streamlining market processes
– but it is perhaps the most ambitious and includes elements of compulsion that have been
absent before.
The second is the inexorable development of technology in the sector and its increased use,
even in the past decade. The boom in InsurTech serves as a useful proxy here. According to
Gallagher Re, InsurTech funding grew from $46mn in 2012 to $521mn in 2022 as (re)insurance
firms turn increasingly to tech.
Smaller and more traditional broking businesses without scale, technological capability,
specialist knowledge and a variety of capabilities are likely to suffer the impacts of this first.
Cutting down the chain
Increasing pressure on wholesalers to prove their value to clients and carriers
Future of placement – the ideal model remains to be decided
A number of sources in both broking and underwriting agreed that with additional scrutiny on
the (re)insurance chain from regulators as well as institutions such as Lloyd’s, disintermediation
is an increasing risk for wholesalers who do not “add value” to a transaction and act merely as
a signpost or “post-box”.
One senior underwriting source accused brokers of relying too heavily on providing “process”
capabilities – i.e. the operational, functional side of transactions – as part of their value
proposition.
When it comes to process, however, some underwriting sources said certain wholesalers are
not even scoring highly on their performance here either.
“Basic competence” in functions such as processing premiums and paying claims should be a
standard part of a wholesaler’s service, but underwriters complained that some intermediaries
had scaled down their operational units leading to a decline in service.
“Their focus is on producing and placing, not service,” as one put it.
Even where brokers are providing top-quality processing, sources warned it could be
“dangerous” to make it the key element of their offer, as the operational part of the transaction
becomes cheaper and easier with the advent of modern technology.
One of the major questions facing wholesalers is what the future of placement looks like and
how they strike the balance between the packaging of large volumes of smaller risks for
portfolio underwriting purposes, and their focus on placing large, complex risk.
London market wholesalers have always carried out a degree of bundling of risk together to
present it to underwriters in an efficient and attractive way. This model continues to develop.
Some brokers utilise their connections with MGAs in territories or specialist lines to which
London carriers have little access, creating binders and acting as a conduit for London
capacity. At the other end of the bundling scale, brokers create facilities in which they package
risks, using increasingly sophisticated automation and data, and secure agreements from
carriers to underwrite a proportion.
The other model is one of brokers relying on deep, specialist knowledge and connections to
place large, complex and highly specific risks. Some intermediaries employ a combination of
both models for different lines of business.
The jury is still out on which of these will be the dominant model in future. Some believe that
ultimately, automation will largely do away with the need for high-touch broking in portfolio
underwriting.
“Wholesalers won’t be necessary for simple stuff ultimately, but they are becoming ever more
important for complex things,” said one specialty broking source.
On the other hand, the thriving binders market and the existence of several London market
facilities suggests that the bundling side of the market still has plenty of traction.
Overwhelmingly, carrier sources believed that the main value wholesalers bring to transactions
is by being a source of detailed, expert information who can present a risk in a way that
underwriters understand and find attractive.
On the other side of the transaction, there is still a strong recognition among retailers and
other wholesalers feeding into London that UK wholesalers provide access to a vital source of
capacity – although as we discuss below, London wholesalers are not the only route to this
capital.
Size matters
Another key element that is becoming ever-more important is scale and the additional
capabilities that often come with it.
Wholesale or specialty brokers that have capabilities in third-party capital and data and
analytics alongside insurance are likely to win the day, as they can provide a fuller suite of
services to clients alongside their traditional offering.
This is because of the increasing size and sophistication of clients, who demand ever-more
holistic and joined-up services around them.
A great number of London market broking businesses are small operations, as this data shows
– although it is difficult to determine how much business sits with smaller players and how
much with the largest.
But even where London wholesalers have scale, broad capabilities and an understanding of
complex areas of risk, it is likely that at least some business will ultimately leak away from
them.
US players – taking the direct route
Some London carriers are already doing business directly with US wholesalers and carrying out
the underwriting in London, and some plan to work directly with the larger US retailers where
possible.
This is enabled by the global nature of many London players and the fact that dedicated
Lloyd’s players are increasingly setting up international hubs.
A variety of businesses already use a variety of hubs to write business alongside a London
base. These include multi-platform companies such as Liberty Mutual, QBE, Chubb, Tokio
Marine and Everest, as well as dedicated Lloyd’s players looking to branch out such as Beazley,
Hiscox, Ascot and Canopius.
The direct link between London insurers and US wholesale or retail brokers is partly assisted
by carriers’ increasingly sophisticated online platforms, which ease the flow of business.
“If [London wholesalers] think they are the only way of accessing London capacity, they are
dreaming,” one Lloyd’s carrier source said.
They added that some UK wholesalers are already adjusting their practices to account for this,
accepting a lower commission of 1% or 2% to “act as a conduit” between a US wholesaler and a
London carrier in recognition of their reduced role in the process.
“If [London wholesalers] think they are the only way of accessing London
capacity, they are dreaming”
This contrasts with the customary 5% wholesale commission carriers pay on, say, a US
property placement, on top of the 10% retail commission.
It is important to note, however, that the risk of partial or full disintermediation of London
wholesalers is far greater with US business flowing into London, where carriers and brokers
throughout the chain have established relationships, and the sources of the original business
are fewer and larger.
In international business, where the retail market is far more fragmented, wholesalers still have
a more essential role in bringing business together from local retailers and packaging it for
London carriers.
Consolidation
US wholesalers/retailers again looking to cut number of London counterparties
Funnel of business into London narrowing, hurting smaller players
Consolidation among broking houses of all stripes has been a major theme in both the US and
the UK for more than a decade.
As noted in this recent piece on Ardonagh, the London wholesale broking scene is showing
signs that it may mimic the US wholesale market.
The latter became hyper-consolidated during the 2010s, partly because the large retailers
consciously trimmed down the panels of wholesalers they used.
Ardonagh’s acquisition of Ed and Besso, through the $500mn Corant deal, points towards a
potential future oligopoly at the top end of the London wholesale market.
Other recent wholesale consolidation deals include Integro’s purchase of Tysers and Miller’s
takeover of Alston Gayler, both of which took place in 2018.
US wholesalers are cutting down the number of London counterparts with which they trade. A
number of US retailers, such as USI, CRC and Hub, who deal directly with London wholesalers,
have already done the same.
A key aspect of the game for London wholesalers now, then, is to capture the greatest ‘share
of wallet’ coming to London via a smaller number of large retailers, at least on the US side.
This narrowing of the funnel into London puts smaller wholesalers at a disadvantage where
they lack the scale to service increasingly large retail trading partners, who are looking for
efficiency and leverage.
The picture is not quite as simple as the above analysis suggests, however. While a large
proportion of London wholesale business originating from the US comes via a small selection
of the largest US retailers and wholesalers, there is also a meaningful amount coming from a
vast number of smaller US intermediaries.
A proportion of these smaller brokers are capable of dealing directly with London carriers,
while some need a London wholesaler to act as a conduit. It would be very difficult, however,
for London carriers to deal efficiently with hundreds of US retailers directly, necessitating a
wholesaler.
What next?
As a significant cohort of wholesalers reaches maturity, the question now arises as to what
their end game is.
Each of the independent London businesses have differing mixes of specialty, reinsurance,
capital market and UK and/or overseas retail and therefore naturally their playbooks will differ.
Nevertheless, their end-game plans will shape the future of the market.
As explored by this publication earlier, we believe it is likely that Ardonagh will look to refresh
its shareholder base as it continues its astronomical growth trajectory.
Howden, as we have also discussed, has turned away from the idea of the IPO it once publicly
aspired to, but has major US growth aspirations and $1bn of recent financing on hand.
The ownership of London wholesale veteran business Miller, currently backed by private equity
firm Cinven and Singapore sovereign wealth fund GIC, is also a current talking point.
Armed with a fresh refinance deal, BMS is now targeting £750mn in revenues in the next five
years, while Tysers, having sold to Australian broker AUB, will focus its energies on wholesaling
its parent group’s retail business into London.
While several of these players have plenty of runway ahead under their current ownership
structures, their future decisions to sell to new backers, trade players or the Big Three brokers,
or work towards public ownership, will have profound further impacts on the broking
landscape.
An earlier version of this story said Ardonagh acquired Price Forbes and Bishopsgate. This has
been corrected to indicate that the businesses acquired were Ed and Besso.
TAGS LONDON MARKET BROKERS ANALYSIS
Rachel Dalton
LEAD REPORTER

London Wholesale Broking - Thunderheads Gather After Boom Times

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04/09/2023, 18:46 London wholesale broking: Thunderheads gather after boom times

London wholesale broking: Thunderheads gather after

UK distribution M&A volume fell by 27% in 2022

2021 2022 Commercial lines

TAGS LONDON MARKET BROKERS ANALYSIS

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