Broker revenue growth in the mid-single digits or higher in 2023: Moody’s

Investment-grade insurance brokers in the United States are expected to continue to see average organic revenue growth in 2023, despite challenges associated with expected weaker economic growth and financial market volatility, according to a new report from Moody’s Investor Service.

The report shows that investment-grade insurance brokers saw average organic growth of 7.2% in the fourth quarter of 2022, which Moody’s described as “still strong” even if it represented lower growth than the year before. Moody’s investment-grade cohort includes Marsh & McLennan Companies Inc., Aon plc, Willis Towers Watson, Arthur J. Gallagher & Co. and Brown & Brown Inc.

The Moody’s report spotlighted that brokers benefited in the fourth quarter from rate increases in commercial property and casualty lines and higher insurable client exposures. The higher rates typically lead to higher brokerage commissions, though they also lead to a lower demand for coverage, Moody’s noted. The strong U.S. dollar, meanwhile, created challenges through the foreign exchange rates on overseas business.

Looking ahead, the report forecasts similar conditions in 2023 will benefit brokers.

“We expect the investment-grade brokers to generate average organic revenue growth in the mid-single digits or higher in 2023, even with weaker economic growth and periods of financial market volatility,” the report said. “Brokers will benefit from the mandatory or critical nature of many P&C and employee benefits offerings and from further rate increases in most commercial P&C lines.”

Moody’s report noted that those commercial P&C rate increases in the U.S. in mid-single digits – as seen last year and projected this year – compared to 2020 when rate increases were as high as approximately 10%. The rate changes differ by business line. While commercial property, commercial auto, excess and surplus lines and cyber insurance have experienced the highest rate hikes, workers’ compensation had modest rate declines and public directors and officers insurance has seen steep declines, the report said.

Rate increases in the commercial property and related business lines could be attributed to insurers’ catastrophe losses, inflated material and labor costs, and higher reinsurance costs, while public directors and officers insurance rates experienced drops due to greater competition among carriers and reduced market demand, the report said.

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Strong labor markets and growing client payrolls are leading to “healthy” revenue growth for brokers in employee benefits and related lines, according to Moody’s, which noted that “clients in most sectors are retaining or expanding their workforces.”

Higher reinsurance rates should benefit brokers with reinsurance arms this year, the report said.

“The January 2023 reinsurance renewals marked a sharp acceleration in rate increases for property reinsurance and continued strength in specialty and casualty reinsurance,” according to the report. “The higher rates reflect years of above-average catastrophe losses, a reassessment of loss potential from secondary perils, rising litigation costs and other forms of claims inflation.”

The report showed that the brokers studied for the report have enjoyed “solid margins supported by revenue growth and expense management.”

“Brokers face higher expenses from wage inflation and increased travel and entertainment, but these pressures are partly offset by savings from hybrid/remote work arrangements and real estate consolidation as well as rising interest income on fiduciary funds.”

In addition to its U.S. report, Moody’s released a global report on insurance brokers. The report highlighted that slower global economic growth and rising market interest rates are creating challenges, and Moody’s has dampened its outlook for the industry from positive to stable for 2023.

“The brokers’ lower but still strong organic growth and steady EBITDA margins will be offset by higher financing costs and weaker interest coverage,” according to the report.

Moody’s projects lower broker revenue growth globally in 2023 because of the weaker economy and smaller property and casualty rate increases.

“We expect GDP growth for the G-20 economies to slow to 2.0% in 2023 and 2.4% in 2024 from 2.7% for 2022,” the report said. “We also expect smaller overall rate increases in commercial property and casualty lines, leading to lower but still strong broker organic revenue growth in the mid-single digits in 2023, with some specialty brokers reporting faster growth.”

Among the key trends in the field, Moody’s pointed to the importance of investments in technology, analytics and cyber to insurance brokers. “Good data and analytics help brokers identify risk management and employee benefits needs and opportunities among clients and prospects in their chosen market segments,” the report said. “Such skills also help brokers track and adapt to evolving risk appetites of insurance carriers.”

“Brokers are investing in digitization, machine learning and robotics, and they are shifting these efforts to the cloud to enable faster updates and broader usage,” according to the report. “The technology push is an important driver of consolidation in the brokerage sector. Large brokers can afford larger yearly investments in systems and processes to compete effectively.”