Most insurance businesses grow through a mixture of organic growth and acquisitions or mergers. Each approach has its advantages and challenges. Finding the right balance between these strategies is critical to optimizing growth and maintaining regulatory compliance, especially these days.
Financial analysts predict that the U.S. economy may slide into a recession in late 2023. Even now, key indicators show an overall slowing in economic growth. Concerns about inflation and the resulting monetary policies contribute to this trend, as does the ongoing labor shortage. In this environment, business owners certainly don’t want internal constraints on growth.
New agencies typically depend upon organic growth until they develop the resources to explore other options. These same strategies of increasing sales, reducing costs, and improving operational efficiency provide stability during periods of economic uncertainty. Because it builds on existing relationships, organic growth also tends to be more cost-effective and easier to self-fund. That’s ideal for businesses that want to maintain liquidity or avoid debt and for those that can’t (or don’t want to) seek outside capitalization.
The factors that drive organic growth also tend to be more within the control of agency leaders. By throttling their marketing and sales pipelines, owners can modulate their growth as needed. This allows time to develop the infrastructure to support a larger client base without jeopardizing the quality of the customer experience, including training existing employees to fill new or expanded roles.
The “slow and steady” nature of organic growth also makes it easier to manage increasingly complex regulatory requirements. Existing solutions, particularly those that rely on a small team to manage compliance needs, may not scale easily. Even agencies that expect individuals to manage their own licenses may find that increased workloads and decreased oversight lead to regulatory issues.
Mergers & Acquisitions
The insurance industry has long appreciated the power of mergers and acquisitions to facilitate rapid growth and diversification to meet market demands. Despite a slight decrease in the number of deals compared to 2021, 2022 was still a record year for M&A activity. In 2023, acquisitions are likely to continue; but the nature of the deals may shift.
In the face of rising valuations, producer lift-outs become a desirable way to expand an agency’s knowledge base. Likewise, decision-makers may opt for strategic partnerships rather than outright acquisitions to acquire turnkey infrastructure. Even agencies considering more traditional M&A activity want deals that avoid unnecessary and expensive delays.
Whether a deal involves one producer or hundreds, rapid growth brings a host of immediate and long-term compliance needs. After all, having a “dream team” doesn’t drive growth if they aren’t properly licensed. Integration requires strategic choices about how many producers need licenses in the various states and for which lines of authority. Unneeded licenses need to be surrendered appropriately. If one or more entities will cease operations, leaders need to manage agency licensing carefully to ensure continuity of service for customers. Additionally, they need to address business registrations with the Secretary of State’s Offices in non-domicile jurisdictions promptly to avoid additional compliance filings.
2023 Is Still a Growth Opportunity
Producers and agency leaders going through their first hard market may feel tempted to scale back plans for expansion and innovation. Tough times don’t have to stop growth, though. They do require taking a more considered approach to the strategies used to achieve that growth. With that mindset – and the right infrastructure in place to avoid regulatory issues – agencies can take advantage of opportunities their competitors may have to let pass.
So here’s wishing you every success!
From insurance licensing, corporate compliance, and surplus lines tax filings to business process management, operations optimization, and more, the ReSource Pro family of companies helps buyers and sellers navigate the M&A process.
Visit us at ilsainc.com to discuss your needs with a compliance consultant.