Below is an overview of the strengths, weaknesses, opportunities, and threats that are commonly faced by insurance brokerages.
Strengths – One of the most important strengths of an insurance brokerage is that these businesses are able to generate highly predictable income from the ongoing placement of insurance policies for personal and business use. Insurance brokerages that focus their efforts on commercial insurance are able to produce high margin incomes when they source risk management products for workman’s compensation, group health insurance, D&O insurance, and supplemental lines. Additionally, insurance brokerages are able to generate recurring streams of revenue once they establish their book of business.
Weaknesses – The primary weakness of these types of businesses is that they face intense competition from both independent brokerages and affiliated agencies within their respective market. This requires an immense amount of ongoing capital allocated towards marketing expenditures. An insurance brokerage needs to engage in high impact networking strategies in order to ensure that they receive ongoing referrals from accountants, real estate agents/brokerages, and attorneys. It is imperative that a new insurance brokerage establish marketing campaigns that highlight the fact that they can source quotes among numerous major carriers.
Opportunities – Insurance brokerages have numerous opportunities for expansion. Foremost, these entities can expand organically through ongoing increases in the ongoing marketing undertaken. Additionally, many insurance brokerages will acquire existing firms that can be integrated into their service architecture and ecosystem. These businesses are able to command a significant premium given that they produce recurring income from renewals. Banks and financial institutions are always willing to provide business loans and business lines of credit to fuel the growth of these entities given their ability to remain economically viable at all times.
Threats – Outside of competition, the ongoing threat that is faced by insurance brokerages is negative changes in the economy. During times of economic recession, these entities can experience downward trends in their revenues as new insurance lines are curtailed. During these periods, many brokerages are able to remain profitable given that they produce recurring income when policies are renewed. For newer brokerages, this presents a greater challenge since they do not generate nearly enough revenue through renewals.
Inflation can also present challenges to insurance brokerages as their underlying costs can increase. However, many of the ongoing expenditures are fixed in nature such as rent and employee costs. The primary variable costs that can increase including marketing expenses and travel/auto costs.