Canadian Underwriter

The future of distribution: Keeping our Options Open

December 1, 1999   by Doug Davis of Davis Consulting Inc.

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There has been a lot of ink spilt recently with respect to consolidators and insurance companies either purchasing or investing in brokerages. Companies engaged in such activities seem to be generally viewed by some parties within the industry as being a form of “Darth Vader”, an evil force enticing independent brokers over to the “dark side”. The fear coursing through the veins of traditional thinkers is that these new-style partnerships evolving between broker and company may risk the future of the independent brokerage community.

People leaning to this line of thinking generally blame the broker consolidator networks and insurers for the rash of brokerage sell-offs having occurred over recent years. However, the issue we have to consider is whether these “big guys” are actually providing a necessary exit strategy for smaller brokers at a time when profits have come under extreme fire and the ruling business philosophy of the industry seems to be “big is better” in the drive for enhanced cost-efficiencies.

In that respect, I believe that broker acquisitions are just another step in the advancement and evolution of the industry. As such, I do not believe that the independent broker is going the way of the dinosaur — there will always be a place/demand for them in the industry’s distribution environment. And, with that in mind, and at a time when profits are low and brokers are actively looking to sell, the question remains, “who can afford them?” In many respects, it is only the consolidator networks or insurance companies able to fulfill this role — one which could very well ensure the continuation of the independent broker system.

Coming to terms

Many brokers who have sold to either consolidators or entered into a financial arrangement with an insurer claim to be happy with the decision. Most say they have adjusted to the new reporting structures and expectations brought to bear on their operations. However, there are some who, accustomed to making their own decisions and have operated according to set ways of running their businesses, are having difficulty with such adjustments. They are finding their management approach is no longer acceptable, and as a result have reacted negatively in conforming to the acquirer’s way of doing business.

Some brokers have found these changed circumstances more than they can bear, and in response have even bought their shares back. I have also seen a personality change in the principle who, even though may still be in charge, is no longer the owner of the brokerage. In essence, they seem to have lost their “fire” and edge in their affairs. As a result, brokers faced with the issue of how they will survive into the future need to give careful consideration to whether selling to an insurer or network consolidator is really the best fit for their operation.

As mentioned above, a sell could entail some hard adjustments for those principals and staff that stay on. I am seeing situations where not much thought has been given to what type of work environment they were now becoming a part of. To whom much is given, much may also be expected. They are now contending with being a small part of a larger whole.

Adjusting to target disciplines

Consider the principal who, prior to selling their brokerage, never had any hard and fast targets but is now required to produce and hit production levels they may not be used to. Consider the older broker who may find that the book is the only desirable aspect of their business and whose services are no longer required. Consider the frustration of a large brokerage finding itself part of an even bigger organization that in contrast appears unwieldy in its management approach — slow in making decisions and, in the process, is constantly delivering conflicting lines of communication. These are all valid considerations a broker needs to evaluate before entering into a partnership.

Testing new territory

Another issue to the new relationship equation is that developing working procedures between “big and small” type operations is also new territory for insurers and the network consolidators. In many respects this is uncharted waters which the industry has entered into, the result producing great logistical, management and communication challenges. Attempts at improvement on these fronts has in some cases caused great frustration for those brokers coming on board and has left some with the feeling of uncertainty about their decision.

Horses for courses

Clearly, entering into financial partnerships with insurers/consolidators is not the right strategy for every independent broker. But, can the independent broker survive into the future and thrive through sheer tenacity and desire to be “independent”? The answer has to be “No”.

Navigating a successful course in the future market of distribution will require careful planning, keeping the options open, and being mindful of the ever-changing marketplace. And, for those brokers shunning the prospect of even considering partnership, be aware of the danger of “painting oneself into a corner” — given current circumstances, you may not have any need to align with a consolidator or an insurer. However, if you find yourself in any of the above circumstances, that consolidator or insurer you curse today may be the alliance you seek tomorrow.

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