As long as there is an insurance industry, wholesaler brokers believe they will have a role to play.
“We will continue to be an important sector – a small sector – but still a very important sector of how insurance is transacted worldwide,” according to Neil Kessler, chief operating officer for CRC Group.
Today’s wholesale brokers expect to continue to thrive despite trends of more carriers including Berkshire Hathaway, Travelers and Allstate going direct to customers in small commercial lines and insurtech startups such as Lemonade, Trov, Slice Labs and Next Insurance also looking to disrupt, or at least compete, in commercial lines.
Also, today’s excess and surplus (E&S) specialists, many of them having grown due to mergers, take strength from knowing they have thrived in the face of what has been the biggest challenge to their business already, namely the consolidation by retail agents of the number of wholesalers they use.
Wholesale brokers say they are positioned to continue to grow in the future. For a second consecutive year, underwriters of surplus lines in the United States generated modest growth in direct premium of 2.8 percent in 2016, up from 2.5 percent in 2015, according to A.M. Best’s 2017 review of the industry.
“We are having our best year ever,” said Jeffrey J. Rodriguez, CEO of Los Angeles-based Brown & Riding Insurance Service, one of nation’s largest wholesalers, where organic growth is up 19 percent this year.
“If you look at the amount of business that is being transacted in the wholesale industry right now – wholesalers have grown substantially over the past decade,” he said. “The future for MGAs (managing general agencies) and wholesalers as distribution mechanisms is very bright.”
Alan Jay Kaufman, chairman, president and CEO, H.W. Kaufman Financial Group/Burns & Wilcox, notes that the prolonged soft market has not slowed his firm’s growth.
“We are growing organically despite the market conditions,” said Kaufman, who maintains the wholesale business is now “robust and healthy” and will continue to be.
“I’m very confident there will always be a place for wholesalers in the market,” Kaufman said. “There’s always room for expertise. Wholesalers bring value to the table through expertise, ease of doing business, speed to market, and relationships. These are the things that are relevant today and will be as relevant 20 years from now. That’s what we are driven to do.”
CRC’s Kessler is also “very bullish” about the future of the wholesale broker because the need for expertise is stronger than ever.
“We’ve really seen dramatic growth in the wholesale distribution channel over the last decade,” Kessler said. “Every segment of the channel has grown, whether it’s the large open market traditional stuff, or the MGA stuff, or the program stuff. And from where I sit, I don’t really see that demand slowing down.”
Wholesaler brokers can help to provide retailers with access to specialty lines insurance products and add value by providing technical expertise on difficult or complex risks.
Consolidation has brought change as well, according to Kessler and others.
“We see a lot of consolidation of firms in our space, which has led to larger and stronger firms,” he said.
The consolidation in the space has allowed the wholesale sector to focus on improving the customer experience. “The customer is expecting easier, faster and more efficient ways to solve problems,” Kessler added.
Steven DeCarlo, chief executive officer of giant AmWINS, thinks wholesalers are in a position to provide retail agencies with more expertise and technology.
“Because the reality is as an aggregator or wholesaler, we just have vast resources to solve retail agency problems and help them deliver solutions for their clients,” De Carlo said.
Kessler agrees. “I think we’re now in a spot where we, as an industry, can make bigger investments in our future, technology and otherwise,” he said. “You’re starting to see firms do more of that.”
Not Immune to Disruption
While times are good, the wholesale industry is not immune to disruption. As retail agents themselves adopt more technology, and as insurtech retail agencies become more important, wholesalers must keep pace.
“In that regard, I really think that the some of the changes (consolidation of wholesale firms) that have happened in the wholesale industry over the past decade have really left us in a better place,” Kessler said.
Kessler sees opportunities for wholesalers with insurtech firms, as well.
“It’s no secret that there’s a lot of investment in the insurtech space right now, looking to disrupt insurance distribution but most have been focused on the retail distribution space,” he said. “I’ve personally spent time over the last year or two with many new insurtech ventures, and each one that I’ve spent time with so far has really ended up with a need for a wholesale insurance broker.”
Insurtechs need the help of a wholesaler when it comes to placing tough risks. “They get to the end of the market, hard to place, and need a specialty expert, ultimately the help of a wholesale broker. We’ve seen some of these insurtech startups become clients of ours.”
While insurtech startups have not targeted the wholesale business, Kessler warns that the industry shouldn’t become complacent.
“I don’t think that should give wholesalers a false sense of comfort,” he said. “We really need to be innovating and pushing ourselves to deliver a better client experience.”
Kessler thinks smart wholesalers today are looking at things like access to markets and delivering better service. “Smart firms are really pushing to focus on adding value to the transaction and finding ways to make their retail clients better, and ultimately delivering a better product to the insured.”
AmWINS’s DeCarlo is not afraid of competition, whether it be from insurtechs or carriers going direct to small businesses. “Bring it on,” he told the audience at the S&P Global Ratings Insurance Conference in June.
Thinking back to the launch of AmWINS over a decade ago, DeCarlo said he heard from many folks, ‘You will be disintermediated.'” His response: “‘Maybe.’ Here we are [today] with a billion dollars in revenue, up from when we started when we had $20 million in revenue.”
To avoid disintermediation, a broker has to bring value, he said.
“I sure as hell am not worried about insurtech firms disintermediating what we do for a living. They’d better be good at their jobs because we are damn good at sales,” he continued.
Insurtechs may be good at technology, but DeCarlo says wholesalers are good at everything else.
“I’m a believer in retail clients. I’m a believer in local relationships. I’m a believer in people, and I’m a believer that technology can change the way we do business.”
The people trying to disrupt the insurance industry by what DeCarlo refers to as “trying to sell insurance to the 10 p.m. guy in his underwear” doesn’t bother him one bit.
“They want to sell insurance to that guy and I wish them luck. I’m not focused on that. I exist to help retail brokers solve their clients’ problems,” he said. “When I hear about disruption to that 10 p.m. underwear guy, I’m cheering for them. I don’t want to be involved. I’m sure there’s a market there. It’s just not a big market.”
Insurtech will have an impact on the P/C market, but Tim Turner, chairman and CEO of R-T Specialty, doesn’t see it changing most of the bread-and-butter wholesale industry business.
“A relatively small percentage of the $70 billion in premium that goes into the E&S market will be vulnerable to electronic trading,” such as insurtech, Turner said. It’s the nature of E&S accounts that insulate most of the business from insurtech, he said.
“Business goes into the E&S market because it needs some kind of special attention; it’s not easy to automate that business. It’s nonadmitted business so there are manuscripted endorsements even on the smallest accounts. Someone has to be looking at it, applying professional expertise and handcrafting endorsements.”
What will be disrupted by insurtech providers is the small business sector or accounts under $25,000 in premium, Turner said. “Insurtech will affect small commercial P/C in the retail world; there’s no question,” he added. “It will allow small businesses to buy P/C solutions in a high-speed, direct fashion and that will be a disruptor.
“When you go north of $25,000, the business is usually more sophisticated, which needs more broking and handcrafting which makes it very difficult to be electronically traded. That’s where the disruption will stop, for the most part.”
Insurtechs could, however, have an impact in one segment: the MGA-binding authority world.
“On the wholesale side, generally speaking, business under $25,000 and part of the binding authority world, which is a big part of E&S, will be disrupted. “Currently, the binding business is all manually done but technology is coming at a high rate of speed. Wholesalers , including R-T Specialty, are spending a lot of money on technology to trade that business electronically, and it will have an impact, but just with small business, not the larger, complicated business.”
Even so, Turner isn’t worried about technology disruption when it comes to E&S. “All this about high-speed technology disrupting the nonadmitted marketplace, I think is a little overstated,” he said. “I think it will have an impact. I’m not denying that there will be billions of dollars that will go through that channel, but I still believe you have to have manual operators looking at these policies.”
Accounts that generate over $25,000 in premium have to be brokered and marketed to several insurance companies. “You have to create market competition and there’s a special expertise that has to be applied to make sure that coverage forms and terms and conditions are adequate and satisfy the exposure. That’s not going to be done by a machine in my opinion.”
The biggest disruption to the wholesale industry has already happened, according to Turner.
“That’s the aggregation and consolidation of the use of intermediaries by the retail customer,” according to Turner.
“What caused this aggregation was the availability of data and analytics as it relates to the cost of inefficiency – that’s the driver that caused this massive roll up and consolidation of wholesalers by the retail community starting with the global brokers. …”
The big global retail brokers pared their list of hundreds of intermediaries/wholesale partners down to just three or four and that changed the industry forever, he said. “The size and the scale of wholesalers are at an historical high” compared to just five to 10 years ago, he said, maintaining that this disrupted the E&S world.
The reason: the buying habits of retail brokers have changed, Turner said. “They are buying more from fewer intermediaries because they know how costly it is to buy from hundreds of intermediaries. They don’t need to buy from hundreds anymore. It’s kind of the Walmart theory; now you can go to one place instead of many and they have every product and lots of services. It’s a bigger store. So that philosophy has hit our industry and is well on its way to creating the size and breath of these (wholesale) stores. AmWINS, CRC and us are two, three, four, five times bigger than we were 10 years ago because of that.”
In Turner’s view, the top 100 retailers have already changed their buying habits and others will follow. “That type of behavior will trickle into tier two or tier three (retailers) as well because they know it’s more efficient and saves money,” he said. “It’s very expensive to use multiple intermediaries.”
However, a 2016 Conning Inc. Insurance Research analysis found that the wholesale distribution channel adds no cost to the insurance transaction. Conning analyzed distribution around cost structure and ratios between the wholesale and retail channels in a study commissioned Wholesale & Specialty Insurance Association (WSIA), formerly known as the National Association of Professional Offices. The study did not address cost as it relates to the use of multiple intermediaries by a retailer.
In the end, the wholesale broker world is no different than the retail world, according to Rodriguez, who spent more than half of his career working as a retail broker. “It’s going to change. … If you look at the emergence of very powerful independent firms ,they are there for a reason.”
As successful as the larger wholesalers are today, their future success is not guaranteed. There can be a downside to wholesalers and retailers getting larger and larger, warns Rodriquez.
“With scale comes inefficiency, comes complacency, the inability to change course.”
For that reason, he believes that the future wholesale world will have a relatively small number of national firms and a lot of specialty firms. “Those specialty firms – say environmental or transportation firms – they are not on the national list but they are utilized because they provide specialized expertise,” he said.
It will become more and more difficult to be a national wholesaler in the future, Rodriguez added. “Look at what’s happened to the top 10 (wholesale) list. How many have disappeared in the past seven years?”
Like in the retail world, varied ownership models, including firms owned by private equity and other alternative models, will also continue to affect wholesale brokers.
“I think there’s a major issue with sustainability with some of the ownership models. If you look at even existing top 10 and their ownership, there’s only my firm and one other that are fully private without any outside ownership – private equity, bank ownership, or public.” Some of those firms have changed hands and management to the benefit of Brown & Riding, he said.
“Part of our growth – we are five times the size we were six years ago – has come from consolidation (in the industry) and by acquiring individuals within those firms seeking alternatives. I’ve been there for M&As – two of the largest firms in the retail space – they don’t always go well and people leave, including myself.”
Rodriguez believes there will always be a place for independent, specialty firms and for firms that can focus on the customer.
DeCarlo agrees. “I think the industry needs small entrepreneurs. I think it needs regional players that are successful at the scale they’re willing to take. But clearly the industry also needs a handful, not defined by me, of national scaled players. In order to have a successful industry going forward, you’ve got to have all three.”