Insurance Carriers Industry Report

August 27, 2018by Nate Nead0

The insurance carriers industry is a well branded one that grew at a CAGR of 3.7% over the years of 2012-2017. This industry consists primarily of those businesses and people that sell insurance policies and annuities. Revenues in the insurance carriers industry comes mostly from commissions earned in sale of insurance to customers. This commission is usually a specified percentage of dollars in policies sold. A smaller percentage of revenues earned in this industry come from consulting fees charged by insurance carriers that provide consulting services, specifically as they relate to risk management. At present, there are 4 major players in the insurance carriers industry: Aon Corporation, Marsh & McLennan Companies, Willis Towers Watson PLC, and Arthur J. Gallagher & Co. Transactions in the industry displayed atypical behavior following the 2016 election. M&A transactions during the first half of 2017 were held back by insurance carriers’ hesitance and skepticism of how the incoming Trump administration would affect insurance policies and the economy in general. For this and many other factors, transaction rates were down 5% during the first half of 2017 relative to the year prior. It is important, however, to note that aggregate transaction size was larger during the year 2017 than it was in 2016.

Collectively, the industry should see growth in the coming years with a hardening cycle. Competition in the industry is expected to escalate in the near future, and with this increase in competition will come higher levels of M&A activity. Growth in the insurance carriers industry is externally affected by the rates of homeownership, the number of motor vehicle registrations, the number of people with private health insurance plans, and the natural disaster index. With future growth, the industry should see more coverage for car insurance, life insurance, and health insurance plans. Even amid greater levels of competition, major players in the industry should expect to see revenue rebounds. One challenge that faces insurance carriers in the future growth period is the high levels of revenue volatility that will accompany the growth of the industry.

An analysis of Porter’s Five Forces shows first that the insurance carriers industry faces moderate threats from new entrants. Regulatory barriers to entry include the difficulty of getting insurer licenses approved by the government, as well as the requirement for small companies to properly formulate a business plan in compliance with United States insurance regulatory forces. With the increased significance of technological advancement in determining the success of an insurance carrier, small companies are also at a disadvantage in that they may not have the proper resources sufficient to maintain and coordinate use of advanced technology at the same levels a major player can. In addition to that, new entrants find it difficult to fund growth initiatives parallel to those of major players. These qualifiers demonstrate the moderate levels of barrier to entry for new companies in the insurance carriers industry. An examination of the supplier power for units in the insurance carriers industry shows how the determinants of a supplier’s power are outside of the control of the insurance carrier. For example, healthcare costs play a huge role in determining demand of health insurance, but healthcare insurance carriers play a limited role in determining what healthcare costs are. In addition to that, factors such as the investment performance of life insurance also control how much life insurance a carrier can sell. These two examples highlight the lack of control that suppliers have over demand for their products. One area that the supplier does hold power in the insurance carriers industry is in product innovation. This shows that ability to fund research and development costs is critical in a carrier’s ability to hold power. Following this, buyer power in the insurance carriers industry is relatively high. A key demand determinant in this industry is general spending by consumers and businesses in the collective economy. This allows consumers to hold a higher level of control in demand for insurance policies. Threat of substitution in this industry lies in the growing presence of online carriers. Many online carriers have been able to place pricing pressure on preexisting insurance carriers, and this has presented a threat to prior occupants of the insurance carriers industry. In addition to that, online brokerage businesses have presented a threat to insurance carriers. However, these threats will likely be offset by improvements in the general economy.

Analysis of these four of Porter’s Five Forces lead to many assumptions that can be made about competitive rivalry within the insurance carriers industry. The first of these is that a competitive advantage lies with those property and casualty insurers that can overcome rising auto loss costs, soaring natural disaster claims in the wake of climate change, and overcapitalization. In addition to this, life and accident insurance carriers hold competitive advantage if they can overcome the persistently low interest rates that were characteristic of the years leading up to 2017. However, it is important to note that rising interest rates might offset this. New regulations, such as the DOL fiduciary rule, will increase the competitive rivalry within the insurance carriers industry. Those carriers that can successfully adapt will find themselves at an advantage. Another source of competitive rivalry comes from an unconventional approach that some companies, such as Ladder, have taken by not charging annual policy fees.

This especially increases competitive rivalry for incumbents. Competitive rivalry from nontraditional InsurTech companies has also increased recently. The competitive advantage in this area lies with those L&A carriers that can successfully implement digital technologies throughout their companies. Competitive rivalry in the insurance carriers industry is also donning a new face in the emergence of completely new types of competitors, such as those automakers that are producing cars that include insurance in the cost of the vehicle itself. Tesla has been a noted car brand that has tried this idea, and it is possible that the near future might see Tesla models being sold with full auto insurance included in the sticker price of the car. This surely presents a threat to insurance carriers, and greatly increases the competitive rivalry within the insurance carrier industry. Technological change has led to heightened competition, and those companies that can best exploit their own competitive advantages should be the ones to succeed in the changing climates of the economy.

Looking at the coming year, many insurance carriers, especially P&C carriers, will begin looking to China and other emerging markets for revenue growth. This is because emerging markets have seen much higher premiums in general. P&C premiums in these emerging markets increased by 9.6% in 2016 while the global rate only grew at a rate of 3.7%. Life insurance carriers should also look to these emerging markets, especially China, the world’s third largest insurance market. Life insurance carriers should exploit opportunities here, but so should other insurance carriers. Non-life insurance premiums rose 20% during 2016, and should continue to see growth in the future. P&C carriers should also look for gains that will come from higher auto insurance rates. However, they should also remain aware of the threat that lies in texting while driving accidents and the increasing frequency of vehicles with special sensors that will increase the expenses of individual accident costs. Natural disasters have also played into this, and should be considered separately from these two attributes. Life insurance carriers should consider simplifying their policies if they wish to see growth, since recent years’ growth in life insurance purchases have been fueled mostly by a sheer growth in population size, not an increase in significance for demand determinants of life insurance. Overall, players in the insurance carriers industry should see growth if they can successfully navigate the obstacles that stand in their way while improving their operational methods and correctly exploiting growth opportunities that lie before them.


Insurance Brokers & Agencies in the US: Market Research Report, INSURANCE BROKERS & AGENCIES IN THE US MARKET RESEARCH | IBISWORLD, (last visited Jan 9, 2018).

2018 INSURANCE INDUSTRY OUTLOOK- DELOITTE US Deloitte United States (2017), (last visited Jan 9, 2018)

Nate Nead

Nate Nead is a licensed investment banker with Four Points Capital Partners, LLC and Principal at Nead, LLC. Nate works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. Four Points Capital Partners, LLC is a member of FINRA and SIPC and registered with the SEC. Nate resides in Seattle, Washington.

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