Sea Change

Property and casualty (P&C) insurance is a far cry from employee benefits insurance (life, medical, dental, critical illness). And it’s a far cry for a brokerage to carry both types. “Historically, the Canadian P&C industry and the Canadian employee benefits industry have run pretty distinct and separately,” says Tina Osen, president with HUB International Canada.

But there must be something in the water lately, because a number of P&C insurance organizations are diving into the employee benefits business.

“Generally, we’re seeing an increase in the level of interest in the group benefits space — from P&C brokers, carriers and other group benefits administrators,” says Philip Heywood, B.C. region transaction services leader with PwC Canada.

One reason has to do with the commoditization of standard P&C brokerage products, particularly if you think about the personal lines space, says Keegan Iles, national insurance consulting leader with PwC Canada. As insurance products and services have become commoditized – think of “vanilla,” standardized coverages offered at increasingly lower price points – what additional value does the broker provide to justify their fees? “The flip side of the commoditization is the fee pressure,” as Iles observes. He notes that through employment benefits offerings, P&C brokers are able to offer a wider range of services and see that as being lucrative.

“There’s also a perceived underservice in the market for SMEs [small and medium-sized enterprises], and that’s an area we’ve seen,” adds Heywood. “HUB has announced that’s part of their strategy: developing a broad broker network to really target and service the SME corporations and business owners.”

HUB has had great success with its U.S. employee benefits operations, according to Osen. “When we looked at our operations in the U.S., and the value they brought to customers and the talent they had acquired, we felt there was an opportunity to bring those capabilities into Canada,” she says.

HUB has acquired 13 Canadian employee benefits brokerages to date. The latest was TRG Group Benefits and Pensions Inc. in January.

Arthur J. Gallagher & Co., too, has done a number of acquisitions on the benefits side. In the past, the global brokerage concentrated most of these acquisitions in the U.S., but it has expanded internationally to include the U.K., Australia, and New Zealand. In the past five or six years, the strategy has been employed in Canada as well, says Bill Zanoni, executive vice-president of corporate development at Gallagher Canada. Its most recent Canadian acquisitions include Toronto-based Accompass; Ottawa-based Leystone Insurance & Financial; and Belton Boisselle, an employee benefits, group retirement, and individual insurance broker and consultant serving primarily Manitoba and Saskatchewan.

“We’re looking for the cultural fit and growth, and opportunities to find the right partners,” says Zanoni. “We want to do what’s best for our clients and help them with all aspects of their risk management portfolio. It helps us retain customers, and the risk management portfolio includes their employee benefits.”

BFL Canada, a private brokerage launched in 1987, discovered the value of venturing into employee benefits years ago. It was a P&C-only brokerage until the end of 2008, when it acquired a benefits operation. “The reason was to diversify our services to better respond to our clients’ needs,” says David Vanasse, president at BFL Canada Consulting Services Inc. “It also gave us an opportunity to develop a partnership with Lockton Global, which had commercial insurance and benefits, and was looking for partners that would have the same level of services.”

BFL Canada has made a couple of small, strategic acquisitions over the years. However, “we’re competing with multinational firms investing massively in acquisitions,” says Vanasse. “The market is hard, but we focus on providing our clients with the best product and services.”

Still, the interest in employee benefits remains. About six or seven years ago, when FCA Insurance Brokers was looking to expand into the space, it decided to build its own benefits business. “What best suited our office was building it organically rather than doing the purchase,” says Warren Griffiths, partner at FCA Insurance. “Our culture was going to be embedded in that business we built better than if we bought a five- or six-person operation. [A merger or acquisition] might be tougher to mesh with how we want to do our business.”

Whatever the growth strategy, adding employee benefits is regarded as a positive for customers, since it provides them with many options. “Not every client will ask, ‘Hey, I want to do benefits as well.’ But when you hear that over a couple of months or years, then it’s definitely a good idea to offer that service,” says Vanasse. Osen agrees. “Customers do like it if we can provide all of the solutions for their insurance buying,” she says.

Baby boomers setting sail

Part of the surge in buying benefits brokerages has much to do with demographics, specifically the baby boomers. They’re hitting retirement age. In fact, some statistics suggest that one-quarter of those working in the insurance industry are set to retire by 2018.

“Typically, it’s succession baby boomers,” Zanoni says, citing one reason why employments benefits brokerages are available for sale in the first place. “In a lot of cases, we’ll find that boomers own the business. They’ve built the company for 20, 30, or 40 years, sometimes. This is the way they capitalize on their equity, as well as create opportunities for the young up-and-comers going forward.”

Those up-and-comers could be a positive for the likes of BFL. Not all employees with a small employee benefits brokerage will want to go with a large P&C brokerage. “Some may be pleased about joining a larger firm, but if you have some entrepreneur types, then maybe this is where we could have opportunities,” Vanasse  says.

But why are boomers selling? In a word, family.

Yafa Sakkejha, CEO of Beneplan, says many owners or operators of privately owned benefits brokers “have this fantasy of passing on their brokerage to their kids. I’m one of those kids. But there’s a lot of these guys who could not convince their daughters and sons to sell the insurance.”

So, if you can’t convince your offspring to get into the insurance game, what’s the next best option? Sell.

For its part, Beneplan has been approached by a number of different companies in the insurance industry — including P&C brokerages. “The thing with P&C is that you have a book of warm customers, so you can bring in a licensed group benefits advisor, open the door and meet with all of our customers,” Sakkejha says.

Negative aspects

Acquiring a benefits business isn’t all smooth sailing. The ability to cross-sell can be an issue, says Georges Pigeon, partner in deal advisory (specializing in financial services) with KPMG. “Each person has to understand what the other has to offer, and they have to market it correctly so that it registers well with the client.” In other words, staff need to be well-educated about the various services being offered by this now-combined broker.

Osen agrees. “I don’t want to pretend  that it’s easy,” she says. “Those who grew up in the P&C space cannot proclaim to be experts in the employee benefits space. So, if you’re going to take that dive and acquire firms in the employee benefits space, you better make sure you’re acquiring firms that have exceptional leadership and that you’ve built out the talent who can help you run that business.”

Another possible challenge (particularly in relationship-based businesses), is the strength of the existing client relationships – especially if the (former) owner leaves the business in the event of a sale or merger, Pigeon says. “You’ll need a good onboarding of those client relationships to ensure the coverage is there going forward.” The acquiring firm may need the former owner to remain with the company for six to 12 months, he adds.

However, for HUB and Gallagher and the like, the pros of acquiring employee benefits brokerages obviously far outweigh the cons. It remains to be seen who else will be taking the plunge.

Brooke Smith is a freelance writer and editor based in Toronto.