Does digitizing help smaller brokerages appeal to buyers?

Small or family-owned brokerages prioritizing digitization strategies will be in a better position to grow through a merger or acquisition, experts told Canadian Underwriter.

But it may be easier said than done, given financial or resource constraints faced by many smaller brokerages.

“On average, smaller brokers tend to be a little slower to adopt new technology,” said Jonathan Brown, general insurance broker at Peters Insurance Agencies Ltd. and president-elect of the Insurance Brokers Association of Alberta. “Sometimes it’s a matter of determining the most…fiscally responsible use of their dollar and how it will affect their brokerage.”

Some legacy brokerages have been around for decades and are built on bricks-and-mortar models. “Digitization is a lot harder for that group in some cases,” he added. “If you don’t have a champion of [digitization] in the business, that’s where you’ll start to see people struggling with it a little bit more.”

But the struggle may be worth it.

Industry demographics suggest principals of many smaller brokerages are nearing retirement and looking to hand off their businesses. Other small brokerages are seeking growth or market scale. Either way, those seeking to hand over the reins must be aware of what buyers want.

Many buyers seek brokerages that have implemented digitization to reinforce process efficiency, Brown notes. Regardless of the brokerage’s size, digitization provides a competitive advantage in a hot M&A market, in which some sellers are seeing offers of four or more times multiple of their earnings.

“The M&A activity within our market segment is actually improving broker awareness of the need for digitization,” said Brown. “Brokers not wishing to sell understand that, to remain competitive within the marketplace, there is going to be a need for a broader-spectrum digital offering.”

The pandemic pushed many brokers to hasten their digital transformations.

“The majority of brokers have, at minimum, implemented e-Docs and the availability of client documents electronically,” he added. “A large number have taken the further step of implementing some sort of third-party software to allow connectivity from their clients to their brokerage…For sure, a smaller segment has done that, but it’s rapidly growing.”

Plus, digitization is dependent on a brokerage’s customer base. “For smaller brokers, most often located in smaller towns and rural areas, there is within their client demographics still a large desire…to maintain face-to-face and physical documentation,” said Brown.

Larger brokerages may be further along the path to digitization, said Melanie Muise, chief operations officer at Navacord.

“[They] have economies of scale and can really leverage digital teams quicker than maybe a mom-and-pop shop, where the president may also be running IT, marketing, finance, procurement, et cetera.”

Plus, there is sometimes a disconnect between what brokers think digitization is, compared to what it actually is.

“Digitization is more than just online quoting,” she says. “[Getting a] quote online is something that even a small broker can do with low cost, but some of those other digitization strategies around automation, around going paperless, are a little bit harder to do when you don’t have scale.”

Luckily, consolidators and acquirers don’t always expect small brokerages to be fully digitized before a sale. Experts say small brokerages looking to best spend their digital dollars should focus on implementing digital tools that encourage organization and efficiency, rather than just digitizing without aim.

 

This article is excerpted from one that appeared in the November issue of Canadian Underwriter. Feature image courtesy of iStock.com/Sakorn Sukkasemsakorn