Insurance Broker Profitability: Why More Policies Don’t Always Mean More Profit
Insurance brokers often focus on growth in policy numbers, GWP and commission income.
But those measures do not necessarily tell you whether the business is becoming more profitable.
Saga’s latest insurance results are a useful reminder of this. In its most recent interim period, Insurance Broking profit increased much faster than the number of policies in force. That reflects a broader point for brokers:
Two businesses with the same number of clients and policies can produce very different levels of profit.
Policy count is only the starting point
Imagine two brokers each managing 10,000 policies.
One might generate substantially more EBITDA because it has:
- higher average commission per policy;
- better retention;
- more profitable product lines;
- lower acquisition costs;
- stronger cross-selling;
- more efficient administration; and
- greater revenue per employee.
The other might be working just as hard, servicing the same number of policies, but producing much less profit.
That is why policy growth should never be viewed in isolation.
Revenue quality matters
A book containing mostly recurring commercial renewals may have very different economics from one dependent on low-margin personal lines or one-off placements.
Brokers should therefore understand not only total revenue, but also:
Average income per client
Average income per policy
Renewal income versus new business income
Commission margin by product and insurer
Cross-sell income per client
A growing book is valuable only if that growth ultimately converts into sustainable profit.
Retention can be more valuable than acquisition
New business is important, but it is often more expensive to win than an existing client is to retain.
Marketing expenditure, sales time, quotation work and onboarding all carry a cost.
A broker with strong retention may therefore generate much better economics than another business continually replacing departing clients with newly acquired ones.
That makes both client retention and income retention important measures.
Staff productivity matters too
For many insurance brokers, people are the largest operating cost.
Useful measures therefore include:
Revenue per employee
Policies per employee
Staff cost as a percentage of revenue
EBITDA per employee
Technology can have a major influence here.
If one broker can automate renewals, accounting, reconciliation and administration while another relies heavily on manual processing, the same revenue base can produce very different EBITDA.
Product mix changes the economics
Saga’s own business illustrates how insurance economics can change as the operating model changes.
Its long-term partnership with Ageas is moving motor and home insurance towards a more capital-light, commission-based model, with Ageas taking responsibility for underwriting risk and much of the policy administration while Saga retains the customer relationship and focuses on sales, marketing, product design and the customer journey. (Saga Corporate)
For an independent broker, the principle is similar.
Different products, insurer arrangements and service models can produce very different margins even where the headline policy count is unchanged.
Measure profit, not just activity
A good broker dashboard should therefore go beyond GWP and policy numbers.
It might include:
Policies in force | Clients | GWP | Commission and fees | Average income per policy | Client retention | Income retention | New business | Acquisition cost | Revenue per employee | Staff cost % | EBITDA | EBITDA margin
Together, these measures tell a much more useful story about the underlying economics of the brokerage.
Why this matters when you eventually sell
A purchaser is unlikely to value a business simply because it has a large number of policies.
They will want to understand how much sustainable profit those policies generate and how efficiently the business can continue servicing them.
Two brokers might each generate £300,000 of commission income.
If one produces £30,000 of sustainable EBITDA and the other £100,000, their economics — and potentially their values — are very different.
For broker owners, the question should therefore not simply be:
“How many policies are we writing?”
It should increasingly be:
“How much sustainable profit are we generating from every client, policy and employee?”
At SWLA Accounting, we help insurance businesses improve their management information, understand the real drivers of profitability and prepare for growth, succession and eventual sale.