Insurance Insider 07 February 2022
Surging wage inflation is an increasingly pressing concern for insurance and broking executives in the London market, with competition to hire and retain top talent threatening to dent profitability at the same time as rating increases begin to tail off.
Numerous sources from across the London market said that staff costs had rocketed over the past year, with the combination of hardening market conditions, the broking “supercycle”, start-ups looking to hire top talent and macroeconomic pressures all combining to hike staff costs.
The sums required to hire the best brokers and underwriters has been variously described to this publication as “out of control” and “crackers”, with the situation most pronounced in strained lines of business where staff movement has been exceptionally high, such as D&O and reinsurance.
Given that most companies across the market are in growth mode, management is faced with the simultaneous challenge of hiring for new roles while defending their existing staff base.
“All of us are all both poacher and gamekeeper,” one London market CEO observed.
While it is difficult to put a precise figure on the wage changes – not least because of varying compensation structures in the market – sources estimated that wage cost inflation was running at between 10%-20%.
This is skewed by the pay rewards on offer for staff moving between firms, with 50% pay rises a common occurrence for those taking on new roles or taking counteroffers, while base pay increases are generally single percentage figures for existing staff.
All of us are all both poacher and gamekeeper
(Re)insurance is not alone in experiencing an inflationary environment for staff costs, with demographic and macroeconomic factors, exacerbated by the pandemic, leading to wage inflation across a host of industries, with pronounced changes in financial services such as law and banking.
The situation in (re)insurance is exacerbated by the sector-specific drivers outlined above.
Market anecdotes abound of offers and counteroffers, lucrative joining bonuses and companies “throwing money around” to hire.
In one scenario, sources told of an underwriter offered a pay increase from £90,000 to £200,000 to move to a large broker, eventually remaining at the existing employer for a salary of around £170,000. Such stories are common.
Wage inflation has been most dramatic in the broking market, as intermediaries look to hire quickly and capitalise on highly attractive trading conditions, where rising insurance prices and GDP growth have led to a spell of bumper broker earnings dubbed the broking “supercycle”.
“When you are in a situation where you haven’t got enough people to service your clients, and you are making a lot of money, then you throw money at it,” one source observed.
Additionally, consolidation in the broker market and the hunger of challenger intermediaries such as Lockton Re, Howden and McGill and Partners has disrupted the market, with expanding operations offering lucrative pay deals to secure top brokers or teams.
Executives at carriers bemoaned a “dearth of talent” for the roles they are looking to fill, with insurers willing to pay a premium for those that meet expectations.
Sources estimated that the increased wage costs seen in the past year could add around 60 basis points to a combined ratio, while at brokers, wages are understood to have a more material impact on profitability, with remuneration expenses accounting for a larger portion of the cost base for intermediaries.
Across the major brokers the cost of staff has largely reduced as a proportion of revenues in 2021, although this could in part be down to the double-digit revenue growth the brokers have enjoyed over the past year.
There are, of course, pros and cons to paying out significant sums to bring in broker talent. As sister publication Inside P&C has explored, broking sources believe team lifts in particular when executed well can deliver the highest returns, particularly judged on a cash basis. (See the full analysis of the team lift model on Inside P&C here.)
Team lifts in numbers II Red.jpg
In underwriting, some business leaders stressed that the rising cost of securing key talent was largely justified on business grounds, with the potential gains from a profitable, loss-free book dwarfing the sums of a salary increase.
However, as the costing landscape begins to transition, with the possibility of flatlining or declining rates in some classes of business, sources warned of a hangover effect on profitability caused by the wage deals that have been agreed at the height of the pricing frenzy.
In particular, there is a shortage of underwriters with the ability to move business, meaning bumper deals for those that can.
Also, technical back-room staff have seen wage increases far greater than in previous hard market cycles.
Such wage increases, it was suggested, were sustainable amid hard market conditions, but retaining such upwards momentum would be untenable.
Sources speculated that 2022 would continue to see wage inflation in classes which remained distressed, but a more benign pricing environment in other lines would lead to a correspondent cooling in the hiring market, although macroeconomic factors were likely to keep up the pressure to up pay.
Analyst questioning at the brokers
Analysts are watching the situation closely at the large publicly listed brokers, with Marsh McLennan CEO Dan Glaser repeatedly quizzed on the subject after the broker reported its Q4 results last week.
The operating margin at the broker reduced by 90 bps to 20.4% in Q4, reflecting “significant investments in the business”.
The executive said that the broker, which has hired over 5,000 staff in the past year, was “very wary” about wage inflation, but confident that rising expenses were being balanced out by strong revenue growth.
Aon CFO Christa Davies said in the broker’s earnings call last week that she expected to see wage inflation into 2022, but it would be offset by other improving efficiencies at the business.
On a conference call with Brown & Brown investors, CEO Powell Brown also said his firm was “absolutely encountering wage inflation”.
The CEO said the impact of wage inflation had not shown up in a meaningful way in Q4 but added: “We are absolutely subject to the pressures of it that anybody else right now is.
“I think that I’ve read recently that we’re in a somewhere between a 30- to 40-year low in terms of labour shortage across all industries. And I’m not going to say that’s indicative exclusively of our industry, but I’m saying the industry hasn’t done a very good job of reinvesting in the teams that are there.”
Sources stressed that wage dynamics at play in the market were shadowing those of previous market cycles, with improved underwriting conditions inevitably adding inflationary pressure to wages.
On top of that, the amount of private equity capital entering the insurance arena and the bumper valuations placed on brokers and MGAs in M&A deals was having a trickle-down effect on staff income.
“The result is that some MGAs are throwing money around like it’s confetti,” one source said.
There is a marked difference in approach between businesses, with big brokers and some start-up underwriters most willing to offer bumper pay deals, while other established underwriting shops are said to be “playing a long game” and allowing some level of staff attrition as a result, and others counteroffering to retain talent.
Some MGAs are throwing money around like its confetti
In reinsurance, the situation is said to be “ridiculous”, especially in the broking market.
Meanwhile brokers with over 15 years’ experience in the D&O market are said to commonly expect a salary “with a two at the front”, whilst competition is incredibly tight for staff with three to five years’ experience.
Pay growth for junior staff has also been boosted, with graduates offered more attractive packages than in previous years, although sources stressed that this followed a number of years of stagnation, and that insurance pay was still well below that of finance professions like banking and the law, in part reflecting the lesser workload.
The bigger picture
The insurance sector is not unique in its experience of surging staff costs, with macroeconomic trends and the pandemic having driven up wages globally, including in financial services.
In the UK, wage levels as of October 2021 were 107.8% of those seen at the beginning of 2020, with the financial services sector outpacing average earnings growth, with wages 113% of the January 2020 figure.
The pandemic has pulled forward retirement dates for a significant proportion of employees, creating a demographic challenge, whilst economies rebounding from the hits taken during the pandemic have led to a tight labour market.
Other mainstays of the City such as banking and law have also seen staff offered better pay deals, with competition for staff corresponding with a boom period for M&A activity, huge investment bank profits and record partner payouts at law firms.