U.S. study shows shrinking broker margins

A study based on the revenue performance of the top U.S. insurance brokerages suggests that the sector’s earnings growth has been severely impacted by premium rate stabilization, increased competition and the clampdown on contingent commissions that followed in wake of the Spitzer investigation. The study, which was compiled by investment bankers WFG Capital Advisors LP, bases its findings on the decline in "organic" or internal growth of brokerages.
The eight brokerage firms reviewed in the study reported a composite 5% organic revenue decline for the final quarter of 2004 compared with an 8.4% increase in revenues for the same period the year before, observes Steven Wevodau, managing principal at WFG. "if you remove the benefit of acquisitions and foreign currency exchange flucuations, organic revenue growth among the [U.S.] industry’s leading firms continues to shrink their revenue base".
Market trends suggest that increased competition, coupled with rate stabilization, have been prime factors restricting the organic growth of brokers, Wevodau says. However, it is also clear that brokers are under closer client scrutiny and that many firms have opted to forego contingent commissions, all of which will present the industry with further challenges in replacing lost revenues, he adds.