Rise of the Invisible Brokers
I do love the history of predictions, particularly ones that are dire warnings that things are going to run out.
In hindsight most are just hilarious. Take this classic of the genre: “The world will run out of oil in 10 years.”
That was a prediction of the US Bureau of Mines, way back in 1914*. And we haven’t become any better at it over time. Peak Oil is a theory that gets recycled every decade or so, mostly by investors who are long on oil!
There is still a reasonably well-known prediction made in 2002 that we will have run out of the black gold by 2030. Good luck with that one – even at the current rate of development of renewable energy, oil will never run out, because it is going to become obsolete way before that happens.
What all predictions of this kind seem to do is extrapolate the current rate of consumption and simply divide this number into the sum of current stocks plus the rate of production.
The reason they fail so dismally is because they always ignore the huge incentives to produce more of whatever it is that is supposed to be running out. Scarcity makes the price go up and when that happens people start looking for, or finding new ways of making, more of whatever the stuff is. And when people start looking they start finding.
Who in 1914 would have envisaged the enormous offshore oilfields in the Gulf of Mexico or in an environment as hostile as the North Sea? So, having dispensed with the myth of Peak Oil, let’s turn to one of our allegedly dwindling insurance resources: brokers.
Since long before I was an insurance journalist we have believed that one day soon we are going to be running out of smaller brokers to buy and consolidate into the big aggregator groups. This places a scarcity value on the remaining independents that today’s investment bankers must be loving. It also creates a fear of missing out that helps stoke prices.
Except the evidence of our own eyes shows this not to be true. The crunch never seems to come. Why is this? The first obvious reason is that when broking businesses are going for record prices, the incentive to go and start a new broker from scratch increases.
Ambitious execs will see the massive value that owners are taking off the table as they cash out and be inspired to have a go themselves. Consolidation also leaves bigger and bigger gaps for smaller specialists to fill. It also dislodges the talent needed to exploit those gaps in really obvious ways. A broker working at an intermediary that is acquired gets a new boss that he or she can’t get on with and in a short time they are off.
Some go to rivals, but plenty of others start on their own. Look at Howden. David Howden started on his own after some M&A at his previous employer. He did this during the height of the last major wave of consolidation in the 1990s when Aon and MMC were frenetically constructing their global broking networks with an almost reckless abandon.
I thought he was nuts because it seemed then that it was game over. How could a fledgling broker survive when facing such monstrous rivals with such market power? But look at what he has achieved. He had a skill and a specialism in a fast-growing class that gave him an initial leg-up and all the while dislodged and disgruntled talent was drawn to his operation.
Now Howden is a big broker and can handle almost any class of business, almost anywhere. Now listen to Episode 82 of the podcast and meet another David, David Bearman of Aventum, the holding company for the broker Consilium and the Rokstone MGA.
Here is another intermediary only just beginning to get the scale needed to start drawing attention to itself. It took a whole 25 years for Aventum to be seen as a player. And this is not just a London thing. This is happening everywhere. The market regenerates itself all the time but we are terrible at noticing that this process is happening under our noses. Why is this? I think this is because we always forget another key factor – brokers are people businesses and when they first start, many are to all intents and purposes invisible.
They just don’t show up in the statistics. David Howden tells the tale of his tiny first London office containing a couple of brave colleagues and the dog he inherited from his soon-to-be ex-wife. Back in 1994 he was almost invisible, except to those who dealt with him personally.
Small broking businesses are starting all the time. It just takes a lot longer than that for them to join trade bodies, have branding budgets and buy advertisements, or for journalists to seek them out and interview them. That’s why we never run out. For every broker acquired that we do know there are probably five-to-ten that we haven’t yet heard of.
It’s the invisible broker effect. What’s more, the invisible brokers of today have a key advantage that the two Davids didn’t. They just had their specialist skill, speed and a massive work ethic, but today technology is also playing to the advantage of start-ups. These days technological innovation is more an attitude than a big expense line in a budget.
Cloud computing and software as a service mean that the smallest start-ups can get plugged into some pretty powerful and scalable admin, marketing, placing, modelling and analytics tech from day one. They can be quick and they have no legacy. The ones that hit the jackpot as early adopters of the best new tech are going to grow exponentially.
As the 2021 Aon and MMC continue to crush all before them it may seem like the smaller broker’s darkest hour, but this is nonsense. There has literally never been a better time to strike out on your own. At risk of making a fool of myself, I will make my own bold prediction: By 2046 I predict that one of the top five global brokers will be a business that was founded AFTER this article is published.