Previously, some of the largest national firms outsourced the administration of the small businesses, but at a high cost — sometimes as much as 60 percent of the commissions. Consider that most large entities have 100,000 or more small group employees under their management. By eliminating the need for outsourcing, these companies could average compensation ranging between $25-$35 per employee per month. This equates to books of business generating $25 million or more annually. At this scale, larger firms can benefit by adopting strategies to operate in a centralized, efficient manner. The investment required can be offset by leveraging new revenue from acquisitions.  

Ecosystems of the future include technology 

There may be debate about the future, but one thing is certain: paper-based enrollment and multiple entry of duplicate data is history. Technology is a necessity and, in most instances, this means a software as a service (SaaS) solution. There are literally hundreds of potential solutions and while this large market will support several, it won't support all.  

Major insurance companies and other providers can only afford the time required for building integrations with entities aggregating large numbers of employees. As the options proliferate, only large entities will be able to manage the numbers of integrations required to automate the enrollment process among large numbers of smaller providers that will eventually enter the technology arena.  

Until recently, these types of solutions were out of reach for the small and mid-sized broker. Today's SaaS solutions can accommodate a company as small as two people and handle the quoting, enrollment and ongoing administration of small accounts. Large firms have the ability to invest in this technology and efficiently centralize administration. In turn, newly acquired small- and mid-sized brokers bring a book of business with strong relationships. Combined, they have the ability to efficiently service this market at a predictable level that is very profitable at scale. 

The evolving workforce 

According to Gregory Bailey, co-founder and CEO at Denim Rivet and general partner at Insure.VC, "The average age for an individual small broker now is typically late-50s." This is consistent with data from other channel partners in the industry and creates a challenging dichotomy for the broker because the entire workforce, including employee benefit administrators themselves (the broker's primary point of contact) are increasingly millennials.   

This younger audience absorbs content differently than prior generations and therefore, changes must be made in the manner in which plan information is presented in order to make strategic planning and buying decisions. The use of online enrollment and administration systems is becoming key. Smaller firms do not always have the skill sets to implement these solutions effectively. However, the traditional broker still commands the client relationships and with the assistance provided by consolidation, can transition to meet the needs of this growing population.  

This evolving workforce goes hand in hand with a transition in the brokerage industry where more of the transactional duties are being replaced by technology and more emphasis is being placed on expertise and value added capabilities. Brokers who rely on being more of a middle man versus a consultant are vulnerable to technology. 

Compliance and professional services 

The small business market, particularly when it comes to health insurance, has become much more standardized due to the ACA. As mentioned, many of the historical duties of a broker are being supplanted by technology. Fifteen years ago, the primary role of a small employer health insurance broker was to obtain quotes from multiple carriers and assemble them into a single spreadsheet for the business owner. Today, that can be done with many different SaaS quoting tools in a few seconds. In order to add value, brokers need to offer more. 

Leveraging the efficiency of technology allows brokers to automate mundane services such as quoting, and focus on delivering centralized professional services such as legal, accounting and human resources, as part of their standard offering to clients. This is enticing to the small- and mid-sized broker competing against firms that are typically unable to hire such professionals. 

Economies of scale 

Hub International of Chicago, an insurance brokerage firm, reported some 29 acquisitions in 2014. They are not alone in doing so. By buying smaller agencies, large national brokers like Hub International, Marsh & McLennan Agency and Arthur J. Gallagher are steering the conversation to the benefits of being acquired.  

A larger entity has a very good grasp of how much it costs to manage an account. They are comfortable with the process and have a high level of confidence that they are able to provide enhanced services to a newly acquired block of business from a smaller firm, and enjoy an economy of scale not possible at a smaller firm. They're more comfortable in the insurance brokerage space where, when you look at the profit margin of a brokerage firm, it's pretty simple arithmetic — revenues less expenses; everything is quantifiable. They simply apply their improved margins and predict expanded revenue from an existing block of business.