Insurance industry trends in the US and Australia
By Shawn Lee, Portfolio Manager, SGH Australian Small Companies Fund
Welcome to Our US Market x ASX Small Caps Series
As part of our ongoing commitment to delivering valuable insights to Australian investors, Shawn Lee, Portfolio Manager of the SGH Australian Small Companies Fund, embarked on an extensive research trip across the United States. He met with over 40 companies across the technology, automotive, insurance, and healthcare sectors. This series unpacks the essential takeaways from those conversations. It provides a closer look at how American businesses navigate challenges like inflation, labour constraints, regulatory risks, and the US presidential election. In each article, we explore a specific sector, connecting the dots to help you better understand the opportunities and risks on the horizon.
Stay tuned as we explore each sector, from stocks making waves to advancements in AI and more.
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Our research trip to the US uncovered several critical insights into the insurance industry, particularly around premium rates, consolidation trends, and the increasing role of technology. Through meetings with insurance broking titans like Aon and AJ Gallagher, we gained valuable perspectives on the sector’s future, which offer direct implications for both the US and Australian markets.
The premium rate cycle continues
Despite moderation in premium growth for areas like commercial property, insurance carriers remain below target profitability. This is especially true in casualty lines, where social inflation and prior period remediation are ongoing issues. Aon and AJ Gallagher emphasised that the insurance market remains exposed to increased volatility due to reinsurance only kicking in at higher attachment rates. This situation prolongs the premium rate cycle, with customers now more accustomed to annual rate increases—much like in the health insurance industry.
This elongated rate cycle could have lasting effects on insurance brokers and carriers alike, supporting the notion that the sector is shifting toward more stable, albeit less extreme, rate fluctuations.
No pressure on insurance broker commissions
A key topic of debate in the Australian market has been the potential curtailment of broker commission rates. Still, our conversations with US industry leaders revealed that such pressures are not present in the US market. Commissions and fees remain transparent to clients, who understand that they ultimately bear the cost of these payments. As a result, brokers remain insulated from downward pressure on commissions, and there is no sign that insurers will soon reduce these payouts.
This insight supports the strength of brokers in the insurance value chain, a dynamic that is likely to persist in both the US and Australian markets.
Mid-market consolidation accelerates
Our meetings also underscored the importance of consolidation in the mid-market sector. The sector includes clients with revenues of up to $1 billion, equivalent to SMEs in Australia. This is the fastest-growing client segment for insurance brokers, and large players like Aon are actively acquiring in this space. Aon’s recent $13 billion acquisition of mid-market broker NFP exemplifies this trend, while AJ Gallagher continues to deploy upwards of $3.5 billion annually on bolt-on M&A.
The consolidation strategy offers significant long-term upside for insurance brokers, as seen domestically with Austbrokers. It will also likely provide strong valuation support for brokers operating in this space.
AI and automation: Leading trends in the insurance industry
As in many other industries, technology is playing an increasingly critical role in shaping the future of insurance. During our discussions, we explored how insurance brokers leverage data to offer clients predictive advice. Brokers might even advise against purchasing certain coverages in specific regions if self-insurance would be more economical. This evolution represents a shift in the role of brokers, from distribution conduits to risk management advisors.
Additionally, the push for further automation within broking businesses offers significant efficiencies, particularly for larger US brokers already well along this journey. We believe there is considerable upside potential for Australian brokers that invest in similar automation initiatives, further enhancing their value proposition in a rapidly evolving market.
Thank you for reading Insurance industry trends in the US and Australia, the sixth article in our US Market x ASX Small Caps Series.
If you want to explore more, check out our other articles, covering the US Healthcare Sector, Automotive Industry at Crossroads, ASX Stocks Making Waves in the US, Artificial Intelligence Innovations and our US Market Outlook.
Disclaimer
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