Brokers are improving profitability through strong client relationships and efficiency improvements, defying a subdued economic environment, increased competition and modest commercial premium growth.

But a Macquarie Business Banking report warns that growth has slowed, with larger brokerages more successful in producing higher profits, and acquisition activity set to continue.

Revenues grew last financial year amid rising competition from direct online insurers, international brokers like Marsh and Aon moving into the SME market and an increased prevalence of authorised representatives, typically operating on a lower cost base.

“Despite the growing importance of digital channels, insurance broking remains very much a relationship-driven industry, especially in the commercial market,” the Insurance Broking Benchmarking Report says.

The report is based on a survey of 201 broking businesses of all sizes nationwide. Data is from last financial year and is compared with a 2010/11 report.

The best-performing brokers increased revenues and profit margins through targeted business development and efficiencies.

“Against the backdrop of the past two years, where many businesses have been challenged for growth and looked internally for costs savings and improved efficiencies, the insurance broking industry has performed favourably compared to many professional service sectors in the levels of revenue growth achieved,” Head of Insurance Broking Rachael Lavars told insuranceNEWS.com.au.

“Looking forward I think there’s further scope for technology to play a role in streamlining processes and, with some adjustment by firms to their focus and staffing mix, with increased levels of business development staff, we would expect to see continued growth.”

Median earnings before interest, tax, depreciation and amortisation increased to 25% of revenue, up from 20% in the previous report, while revenue growth gained 16%, outpacing gross written premium gains.

“Overall, the picture is one of gradual organic growth in an economy that is itself expanding below trend rates,” Macquarie says. “For many businesses, profit growth has come from efficiency gains and reduced costs as much as business growth.

“Scale appears to be increasingly important in achieving consistent growth, with the largest increases recorded by companies who already had relatively high levels of revenue.”

Companies generally expect profits to continue rising modestly over the next year, with 47% forecasting revenue growth between 1% and 9%.

But there are marked differences between larger and smaller businesses.

Among high-revenue companies, 45% expect growth of 10% or more, while 30% of low-revenue businesses expect unchanged or lower profits, or cannot say if they will rise or fall.

Only 23% see rising premiums as a likely driver of improved profitability, compared with 68% in 2010/11.

The report indicates many businesses will look at mergers and acquisitions as a way of improving performance.

One in five had made an acquisition in the past 24 months, in line with 2010/11 findings, but the number willing to either buy or sell increased to 22% from 14%.

Ms Lavars said the survey didn’t show a dramatic shift in the size demographics of a typical brokerage in 2013 compared to 2011.

“With a lot of recent acquisition activity being driven by aggregator models that purchase partial stakes in businesses and allow them to continue to operate under an owner/driver model, there is not necessarily an impact on firm size,” she said.

Key risks identified include client economic hardship, particularly in Victoria, while declining interest income is also affecting businesses, especially higher-revenue companies, Macquarie says.

About 59% of brokers see online insurers as a significant competitive threat, rising to 73% in Queensland, where a dispersed population may assist online sales.

Some 59% of respondents identify websites as an area of planned capital investment in the next three years, while 33% will target customer relationship management systems.

“I don’t believe online sales are going to replace the relationship-driven nature of the industry by any means, but it will be interesting to see how online investment shapes its growth,” Ms Lavars says.

Attitudes to new technology are positive, with 96% of companies agreeing or strongly agreeing new technology is critical to improving efficiency and expanding business.

Macquarie warns an increased online presence should complement a broking business’ role as a trusted personal adviser, and should not diminish the relationship or commoditise the offering.

“The success of most companies in maintaining their competitive position in this challenging environment is a testament to the resilience and professionalism of brokers across the country,” Macquarie says.

“One of the drivers of that success is the proven ability of brokers to cultivate and nurture strong client relationships.”