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.

Margins impact

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.”

Driving factors

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.

]]> http://www.artemisfinancial.co.uk/group-regulatory-and-reporting-manager-2/feed/ 0 http://www.artemisfinancial.co.uk/is-losing-your-contractors-worth-it-for-the-long-term/ http://www.artemisfinancial.co.uk/is-losing-your-contractors-worth-it-for-the-long-term/#comments Thu, 05 Dec 2019 12:04:28 +0000 http://www.artemisfinancial.co.uk/?p=2037 Find out more...]]> December 2019

Gradually throughout the year more and more companies have set the precedence for incoming IR35 reform by confirming that they will not be engaging with contractors regardless if they are considered outside IR35. Banks and financial companies alike all seem to be following suit.

For contractors working with RBS, Tesco Bank, Barclays, Lloyds and Morgan Stanley the future points towards being put onto the payroll before the reform is introduced on 6^th April 2020. The most likely outcome for contractors being put on the payroll through an umbrella company.

These companies are reportedly giving contractors no option but being paid via PAYE to avoid IR35 reform altogether. IR35 rules do not apply to contractors working through umbrella companies nor employees. Furthermore, HMRC will not dispute engagements in which independent workers are operating inside IR35.

This cautious strategy may not pay off however and could potentially pose a greater threat to private sector firms by scrapping all outside IR35 contractors. From where we’re sitting it may be a risk not worth taking, for the following reasons…

Potential skills shortage

Most contractors would prefer to continue working independently and outside IR35, so giving contractors an ultimatum to go PAYE or leave could mean private sector businesses risk losing their highly skilled, and sometimes irreplaceable, contractors if they decide to leave the contractors no choice.

From our work with over 100 businesses and recruitment agencies we have concluded that there could potentially be tens of thousands of opportunities for contractors wanting to carry on working outside IR35 like before. We are all unsure of how big of an impact the reform will really have but it may not be all doom and gloom for those wanting to maintain higher day-rates.

Significant cost implications

If the risk of losing your superior talent isn’t enough, shifting contractors onto the company payroll is a costly process, without even considering the overall costs of employment. If businesses opt for turning their genuine contractors into employees the cost of paying employer’s National Insurance Contributions is reason enough to re-think, especially for companies with hundreds/thousands of contractors. In addition to this, the various other expenses of employees run the total up higher than you think. Office and equipment costs, sick pay, holiday pay and paid maternity or paternity leave.

For hiring organisations who depend on keeping their finest contractors may often have no choice but to offer great employment contracts. Company cars and other employee benefits are often a way of making up for the money contractors will be losing out on.

In simple terms, although independent day-rates might seem more expensive to companies, a lot of the time hiring a contractor outside IR35 tends to be cheaper.

Administrative burden

With greater costs being taken into account and also the potential skills shortage, there is then the burden of putting thousands of contractors onto the payroll. Not only that but looking after these workers in line with an employer’s HR obligations.

While private sector firms might argue that assessing each and every contractor’s IR35 status is an intimidating job, in contrast to onboarding thousands of employees, it is at least a one-off task assuming that the details of the contractor’s engagement remain the same. 

Restricted business agility

The most valuable part of using contractors is the unrivalled flexibility they provide businesses. Private sector firms can engage contractors as and when they need them with not many strings attached. This is extremely helpful in handling fluctuations in demand. The ability for firms to scale their workforce to their will should not be underestimated and employing contractors in permanent positions will eliminate that benefit.

Only time will tell as to whether these financial services firms rethink their position. There is, however, at least one thing we are confident in: that IR35 reform is manageable and Qdos are engaging with many hiring organisations looking to ensure fair assessment of their workers.

Find out more about IR35 reform in the private sector

Lloyd’s performance management director Jon Hancock has said he expects the market to shrink for the next two years, as the Corporation takes a tough stance on underperforming lines of business.

Speaking at the Association of Lloyd’s Members national conference yesterday, Hancock said the market needed to change what it is doing to improve underwriting results.

“I expect the market to shrink this year and to shrink next year,” he said. “Premiums must surely reduce if performance is going to notably improve. Doing the same just cannot be an option for syndicates and portfolios which are underperforming.”

Doing more of the same can only be an option “if you are performing really well or outperforming the market”, Hancock added. “The market cannot simply grow exposures to maintain premium.”

Lloyd’s does expect some syndicates to grow, but only if they are doing something different, the executive added.

“That could mean a new product, a new proposition, a new acquisition or a new footprint. We will support those profitable sustainable plans. But overall, we expect the market to shrink in these competitive conditions,” he said.

Monitoring market growth is one of five key areas the Lloyd’s performance management team is focusing on to turn around the market’s results, with accident-year loss ratios in all segments running above 100 percent.

Other areas of focus include catastrophe exposures, facilities, operating expenses and acquisition costs.

Lloyd’s typically writes 8 percent less premium than its allotted stamp capacity for the year, the executive explained. In 2016, the market wrote 12 percent less than its stamp.

“That is a good sign of some discipline,” Hancock said. “It is good – it is essential, in fact – that managing agents are making those tough decisions.

“We are entering a Darwinian phase where only the fittest will survive.”

Some in the market believe that Lloyd’s needs to see some failures, and record large losses, in order to maintain the health of the overall market.

When questioned on his viewpoint, Hancock said Lloyd’s had a duty to ensure the market does not enter a period of sustained losses or low returns.

“That has an impact on reputation, on the Central Fund, on credit ratings etc,” he said. “Syndicates need to stand on their own two feet. The weakest won’t.

“We need to put a really safe environment around [the weakest syndicates] so that policyholders, the Central Fund and the mutuality of Lloyd’s is protected.”

The Corporation is enforcing a risk-based approach to its market oversight, and will focus its attention largely on underperforming syndicates.

“I can assure you that a new risk-based approach means we identify poor performers much earlier,” Hancock said. “We can intervene much faster and harder when we need to.”

Lloyd’s will restrict or remove authority when syndicates start to underperform or diverge from their approved business plans, he continued.

“We will not allow syndicates to begin writing business we don’t believe they have the capability to, or where we have evidence that the market just cannot write it successfully,” he added.

“This also means we will spend less time on the best performers, so they have more time to focus on running their businesses. We will leave them to work harder for their returns.”