Industry Trends to Exploit for 2025

By Catherine Oak, CRM, CIC & Bill Schoeffler

Minding Your Business

Agency owners must observe and learn about significant new trends in the insurance industry. The following are the critical industry trends insurance agencies should track for 2025.

1. 2025 M&A Activity & Pricing

The field of buyers has shifted. The pace of acquisitions has slowed for a few reasons. In some situations, buyers are strategically slowing down. Some acquisition activity has been dampened by increased inflation and higher interest rates.

According to OPTIS Partners, the deal count is down 17% in 2024 compared to last year, mainly due to the increased cost of capital. Through the third quarter, 535 mergers and acquisitions were reported. They feel this is a return to an “old normal,” as the deal pace levels off but is still above the pre-2021 flow. They expect the pace to continue as the supply of agencies likely to be acquired in the next five years is significant, and the demand from the investing community remains strong.

The prices currently paid by publicly traded brokers, large regionals, and agencies funded by private equity firms are still high. They will continue to be high for the valuable, desirable firms. Since the supply is dwindling, the prices may be even higher for those that remain if they fit the profiles of the major buyers today. As long as insurance agencies remain profitable, there will be buyers. Some buyers with weaker balance sheets may be forced to the sidelines if interest rates do not decrease significantly.

According to our discussions with key acquirers, M&A activity is again expected to continue during 2025 with some caveats. Here are some of their responses:

According to Clark Wormer, M&A Director for HUB International, “Hub is on track to partner with 60+ great merger-partners in 2024 and expects to continue to be very active in bringing on merger-partners in calendar year 2025! HUB has best-in-class tools, resources, expertise, and technology, which they believe merger partners are seeking. Their current acquisitions help expand their business.”

Foundation Risk Partners (“FRP”) began in November 2017 and are approaching $700 million of annualized revenues by year-end 2024! They do not announce their transactions but are now in the top 20 largest US independent agency brokers. They made numerous acquisitions this past year and will continue that trend in 2025. They are very competitive and easy to work with, bringing significant synergies to acquired agencies. FRP is looking for more add-ons and new niches to spread nationwide. They would especially like to add firms in the Pacific Northwest, Texas, the Rockies, the Southwest, and New England. They are looking to continue to build existing places, including the Northeast, Southeast, the Midwest, and California, where they have many acquisitions already.

A specialty mid-size national broker, Risk-Strategies, is based in Boston. The retail subsidiary of Accession, Risk-Strategies, will close transactions totaling $65 million in EBITDA and have added an Agriculture specialty in 2024. The company expects to continue recruiting talent and remain acquisitive in 2025. It is a quality buyer looking for like-minded firms that prioritize employees and clients. Risk-Strategies is very well capitalized and has an excellent capital structure.

Alliant Insurance Services (Alliant) is headquartered in Irvine, CA, and is the 5th largest broker in the US, with 130 offices throughout the United States. Though Alliant Insurance Services is viewed in the insurance distribution market as having exceptional organic growth year over year, 2024 has been a very strong year on the acquisition front. Alliant has closed on 24 acquisitions as of 10/1/24. Alliant will continue to seek high-quality businesses that fit well within one or more of their operations (specialty, middle market, underwriting, employee benefits, or consumer operations) for 2025.

Inszone Insurance, a prominent player in the insurance industry, has already completed 42 acquisitions in 2024, with 10 more in the pipeline by year-end. Their ambitious goal for 2025 is to reach 60-70 acquisitions, positioning the agency for substantial growth. Inszone’s strategy focuses on expanding into all 50 states, supporting clients with commercial and personal lines, and offering employee benefits. Inszone provides partnering agencies with a well-established, fully integrated platform from which to grow and build.

Arthur J. Gallagher will continue to be a good player in the acquisition field. They do not advertise the number and value of their transactions. However, they are competitive and looking for great agencies throughout the country.

BroadStreet Partners, High Street, USI, and other newer buyers, especially World, Relation, ALKEME, and Patriot, are funded by private equity and venture capitalists. They continue to aggressively solicit and buy independent agencies. They all have large amounts of capital to use for transactions! Acrisure, which had around 100 or more transactions each year from 2019 through 2022, has completed only 22 transactions for the first three quarters of 2024.

Private equity firms have been buying up insurance agencies for their investors. This makes a lot of sense because the return on investment is typically 20% to 30% plus, greater than most other available investments today. PE firms often still pay 9 to 12 times EBITDA for well-run agencies!

Deal Terms

There is a broad spectrum of prices today based on the motivation of the uniqueness of the seller. Most down payments consist of approximately 80% cash price and the balance in stock. Sometimes, the stock can be used for key perpetuation candidates to have equity that the seller and buyer want to ensure will remain in the agency after the sale. In this way, they feel a part of it and then have some skin in the game to stay on for years after the key owners retire. We usually recommend that our sellers take the stock as it can give them a significant additional amount of money when they sell it due to the high rate of growth these acquirers have compared to a typical independent agency. A number of these buyers have been averaging about a 30% growth in stock value per year!

Smaller books are purchased at around 6.0 to 8.0 times EBITDA. There aren’t many books or agencies today that do not command at least two times revenues as a minimum!

• Internal Perpetuation

It is often difficult for small and medium-sized independent agencies to perpetuate internally. The next generation often lacks the management and sales skills to replace the majority owner. In some cases, there are no perpetuation candidates at all. If this is the case, an external sale makes much more sense, as an internal sale may not work out, and retired principals don’t want to return to work!

If an owner sells internally, it is usually for less than the value of an external sale. Existing expenses usually will not change, as they do in an external sale. Also, there is a risk that the internal candidates might not work out, and they often don’t have any or very little money to do a buy-out.

The terms of internal purchases are typically 20% to 30% down, with the buy-out lasting 5-10 years. The length of time it is paid out depends on the agency’s cash flow and whether the internal buyer has any money of their own. An internal buy-out rarely has an earn-out component, so the value should be conservative to prevent paying too much for the firm.  Often the internal buyer uses the agency’s cash flow to pay the loan off over time. Buyers often want the retiring owners to retire after a few years so they can manage the firm without their influence and use their compensation and perks to pay off the note.

Often, the retiring principal finances the deal for the internal candidate. Oak & Associates recommends that the internal buyers get a ten-year loan so that the retiring shareholders don’t have to worry about getting paid. Several specialty banks make loans to insurance agencies specifically for internal perpetuation.

We also recommend that all owners of internal sales should consider whether a GRAT (which stands for Grantor Retained Annuity Trust) would be the internal perpetuation tool to use if the owners are still healthy. There is typically a minimum payout of five years, and both principal and interest can be deducted.

• Potential Tax Law Changes

With President Trump’s huge win as our 47th President, there is little concern about tax increases that were much more likely under a Harris administration. Trump’s previous tax plan was expected to expire, and the pre-Trump tax level of 39.6% would replace the current ordinary income tax rate of 34.6%. However, although the rate was lower and the standard deduction higher, state and local tax (“SALT”) exemptions were capped at $10,000, which resulted in increased federal taxes for some high-wage earners in certain states with high personal income taxes.

Any change to tax law will require extensive political negotiation, so it is too early to predict what will happen. On the campaign trail, Trump emphasized using tariffs to generate tax revenue. More tariffs will likely occur, but not at the level Trump alluded to. Trump also floated the idea of no income taxes on tips, overtime pay, or social security income. Those might become unfulfilled campaign promises when the legislators meet. There is a good chance that Trump’s promise to lower corporate taxes will be implemented.

There was no discussion about Trump’s changes to capital gains taxes. The Harris team discussed increasing the rate to 28% for taxable income over $1 million and taxing unrealized capital gains. Any changes to capital gains taxes under the new Trump administration would result from broader tax negotiations. There appears to be no tax reason for business owners to change their schedule at this time when selling their businesses.

Our political leaders need to address the budget deficit and the national debt. There has been no significant action to address these growing problems for years. The fallout from these problems has been kicked down the road repeatedly. Elon Musk teaming up with Trump to improve the federal government’s efficiency sounds good, but it is a herculean task to accomplish.

• Group Benefits and Health Insurance

Today’s younger employees expect benefits packages tailored to their unique needs and life stages, leading to a surge in personalized benefits offerings.

Employers are increasingly offering flexible benefits plans that allow employees to choose from a menu of options. These include traditional health insurance, dental and vision coverage, wellness programs, and financial planning services. There is also a growing trend towards voluntary benefits, where employees can select additional coverage options such as critical illness insurance, pet insurance, or identity theft protection, often at a group rate. One of our clients pays for all employees’ homeowners insurance.

Online portals and mobile apps make it easier for employees to manage their benefits, access information, and submit claims. These platforms provide real-time access to benefits information and streamline administrative processes. The COVID-19 pandemic has accelerated the adoption of telemedicine. Many group benefit plans now include telehealth services, which allow employees to consult with healthcare providers remotely. This increases access to care and convenience.

Comprehensive wellness programs that address physical, mental, and financial well-being are increasingly popular because employers recognize the importance of maintaining a productive and engaged workforce. These programs may include gym memberships, mindfulness training, stress management workshops, and financial wellness seminars. Employee Assistance Programs (EAPs) offer confidential counseling and support services for personal and work-related issues. Incentives are used to encourage healthier lifestyles and behaviors. These incentives can include reduced insurance premiums, gift cards, or additional paid time off.

Addressing financial stress is a key component of comprehensive benefits packages. Employers offer financial education programs to help employees manage their finances, plan for retirement, and reduce debt. These programs can include workshops, online resources, and one-on-one counseling. Some employers are providing student loan repayment assistance as part of their benefits packages, recognizing the burden of student debt on younger employees.

• Natural Disasters’ Effect on Insurance

Due to the increasing population and growth in previously unoccupied lands, insurance claims for natural disasters, including hurricanes, wildfires, floods, and earthquakes, are surging. This trend is putting considerable pressure on insurers’ financial stability and profitability. To mitigate these financial impacts, insurers raise premiums to cover the increased risk and potential losses.

Insurers are leveraging advanced risk modeling and predictive analytics to better assess the potential impact of natural disasters. These tools help them understand patterns and predict future events more accurately. By integrating data from various sources, including historical weather data, climate models, and IoT devices, insurers can refine their risk assessment and pricing strategies.

The insurance industry actively promotes the use of resilient building materials and infrastructure improvements. USAA offers up to a 5% discount on homeowners insurance premiums for policyholders living in recognized Firewise communities in several states to encourage wildfire mitigation efforts. Some insurers also provide discounts for homes built to meet FORTIFIED standards developed by the Insurance Institute for Business & Home Safety (IBHS), which improve resilience against hurricanes and high winds.

Insurers offer more customized policies that cater to specific needs and risks associated with different geographical areas. New insurance products are emerging to address the changing risk landscape, such as “Parametric insurance policies.” These policies payout based on predefined parameters, such as the magnitude of an earthquake or wind speed of a hurricane, allowing for faster claims processing. “Microinsurance” is designed to protect low-income individuals and communities; in this case, it provides affordable coverage for natural disaster risks. Governments and regulatory bodies are implementing stricter regulations to ensure insurers maintain adequate reserves and adopt sound risk management practices. Public-private partnerships are also becoming more common in addressing the financial challenges of natural disasters.

The insurance industry is embracing new technologies to enhance risk management:

IoT and Sensors. These devices monitor environmental conditions and provide real-time data, helping in early detection and warning systems.

• Insurtech Technology

The insurance industry is transforming remarkably, driven by technological advancements reshaping traditional practices and ushering in a new era of efficiency, personalization, and enhanced customer experiences. This revolution, encapsulated by the term “insurtech,” redefines how insurance companies operate and interact with their clients.

Integrating artificial intelligence (AI) and machine learning (ML) into core insurance processes is at the forefront of this transformation. These technologies are revolutionizing underwriting, enabling insurers to develop more accurate and personalized pricing models based on individual risk profiles. Machine learning algorithms enhance risk assessment capabilities by leveraging vast amounts of data, including historical claims, weather patterns, and geographic information, leading to more informed decision-making.

The impact of AI extends beyond risk assessment, significantly improving customer service. AI-powered chatbots and natural language processing (NLP) streamline communication, provide quick query resolution, and enhance customer satisfaction. This shift towards AI-driven customer interaction improves efficiency and sets new industry responsiveness standards.

Integrating Internet of Things (IoT) devices and telematics is gaining significant traction, offering innovative risk management and assessment approaches. The global IoT insurance market, valued at $15.09 billion in 2023, is projected to grow at a staggering compound annual growth rate (CAGR) of 29.7% from 2024 to 2030.

Usage-Based Insurance (UBI) models are becoming increasingly popular, particularly in auto insurance. These models utilize telematics devices to track driving behavior, allowing insurers to offer personalized policies based on individual driving habits. In the commercial sector, telematics improves risk assessment, reduces claims, and lowers premiums by enabling real-time monitoring and proactive risk management.

Embedded insurance is transforming how insurance products are offered and accessed. This innovative approach integrates insurance seamlessly into non-insurance platforms, simplifying access and making insurance a natural part of other products or services. By embedding insurance into everyday transactions, companies are creating more seamless and convenient customer experiences, reducing friction and broadening the accessibility of insurance products.

The ability to tailor insurance products to individual needs is becoming a key differentiator in the market. AI algorithms enable insurers to create customizable coverage options based on individual risk factors and preferences. Data collected from telematics and IoT devices allows for personalized pricing and coverage options, ensuring that premiums are fair and reflect actual risk.

• Market Conditions

A mixed bag of market conditions will continue in 2025.

MarketScout notes that although insurers expected significant impacts from Hurricane Helene, much of the damage appears to be flood-related, with many policyholders opting not to purchase flood coverage.

However, industry losses are expected to reach over $10 billion, and the overall impact on insurers could have been far worse. Hurricane Helene was projected to have a noteworthy impact on insurance agents’ professional liability. They may now face scrutiny over whether they offered flood insurance to clients and whether they formally declined such coverage.

Richard Kerr, Chief Executive Officer, Novatae, commented, “Depending on its strength and where it made landfall, Milton could become one of the most significant insured property catastrophe events in recent years.”

The US commercial insurance sector saw a composite rate increase of 3.8% in Q3 2024, with property insurance up 5.7% and commercial auto and transportation risks experiencing the highest rise at 7.3%.

Meanwhile, general liability and umbrella/excess both reported a rise of 4.3%, whereas workers’ compensation remained flat. The lowest rate increases were reported in the crime, EPLI, fiduciary, and surety segments, all in the 1-2% range. In personal lines, the composite rate increased by 6.75% for the quarter, slightly moderate compared to the previous quarter. However, the full impact of recent natural catastrophes, such as Hurricane Helene, is yet to be reflected. With Hurricane Milton, further rate hikes are anticipated, according to MarketScout.

Kerr added, “We have always observed a microclimate environment in personal insurance pricing. Hurricane Milton was projected to come ashore near Tampa, Florida, as a strong Category 3 storm. The ramifications for Florida’s personal lines insurance market are substantial. While these effects will have some influence on the national composite rate, Florida-specific rates will see considerably sharper increases.”

MarketScout warned that the current composite rate hike underscores the insurance industry’s resilience in responding to evolving risks but raises questions about future stability, particularly in regions prone to extreme weather events.

For Q3 2024, personal lines rates for homeowners under $1,000,000 value increased by 7%, and homeowners over $1,000,000 increased by 8%. At the same time, auto premiums increased by 8.7% and personal articles by 4%.

Summary

The first step is being proactive and knowing how current trends will affect the firm. Managing the agency in a way that exploits these trends will then allow the firm to succeed. Agency owners must also establish business and marketing plans to stay ahead of the competition.

Please look at Oak & Associates’ website, www.oakandassociates.com, to download our Sales and Marketing or Business Planning templates for free.