I love the business of insurance brokerage and employee benefit advisory. I wrote a blog post about it here. Even though I stepped away from agency leadership last year, as I relayed here, I continue to consult with some employers, insurance agencies, and other organizations (e.g. biotechnology firms).
But, I miss being “in the mix” on a daily basis.
There are trends in insurance distribution which are inarguable. Principals are aging. Private equity money and public brokers are chasing acquisitions. Insurance agencies are being rolled-up. There is a continued lament of inadequate middle-management prepared to “step up” and succeed the last generation of leaders in our industry.
“PE tends to be a short- to medium-term investor,” said John Marra, US insurance deals leader, PwC. “They could buy a brokerage for $5 million, and that purchase might represent a 5X free cashflow or EBIT (earnings before interest and taxes). They could finance 30-60% of that, then grow the business and sell it for $10 million three years down the road, at a higher multiple than they paid the previous owner of brokerage.”
Source: https://www.insurancejournal.com/magazines/mag-features/2005/01/24/51209.htm
In addition to the transaction I was involved with as a seller, I have hundreds of friends that were involved with agency recapitalizations, ownership group successions, and outright sales of their firms. The motivation for approaches to agency succession is idiosyncratic to each firm; There are a bunch of variables that include, but are not limited to, a desire for liquidity, positioning key-employees (and family members within the business) for continued success, improving resources for clients, enhancing the professionalism of the firm, increasing access to general management resources, and broadening the products for “cross-sale” / increasing customer wallet-share.
I have observed that a mismatch oftentimes occurs between the expectations of sellers (and their teams) before a transaction closes and the experience afterwards. There is no single story that encapsulates all the experiences, positive and negative, of a private agency transitioning to a new ownership structure. There are substantial differences across agency acquirers, including capital structure, organizational design, target market(s), and geographic scope. (Here is a comparison of some acquirers from Reagan Consulting.) Amongst post-transaction disappointments related to me by friends over the past twenty-five years are surprise headcount reductions, disruption to customer service for specific customer segments, and staff defections (including the distraction of litigation.)
I wonder, “What if the best opportunity for insurance brokers in my lifetime is at hand right now, and the best strategy is to step into the void with clients and agency talent every time an agency acquisition occurs by a PE-backed or publicly-held agency? We have seen this film dozens of times; Acquisition occurs, staff turnover, clients churn…. Could we build a model to fill that void reliably as the most trusted, highly regarded, and best value insurance services firm in the United States?”
“What if?”
I find myself wondering whether there is a way to incorporate the best of small, entrepreneurial insurance brokers with the best of large, structured consultancies. Where are the opportunities to establish a firm’s brand as worthy of the reputation as “most trustworthy,” “best value,” and “most professional?”
Supplement and Contingent Commissions – Large insurance brokers communicate that their scale leads to lower costs. What if, in actuality, their relationships to large insurers leads to less choice and worse pricing due to conflicts of interest, arising from perverse incentives? I wonder how large agencies, who may find these fees making up 7% of their total revenue, will position to both be independent and unbiased while continuing to accept these fees?
I don’t believe they are prepared to truly adapt. To make matters challenging for them, it has become a matter of law that they must. See this blog post here.
The effect of such financial incentives is troubling, said Michael Thompson, president of the National Alliance of Healthcare Purchaser Coalitions, which represents groups of employers who provide benefits. He said brokers don’t typically undermine their clients in a blatant way, but their own financial interests can create a “cozy relationship” that may make them wary of “stirring the pot.”
Employers should know how their brokers are paid, but health care is complex, so they are often not even aware of what they should ask, Thompson said. Employers rely on brokers to be a “trusted adviser,” he added. “Sometimes that trust is warranted and sometimes it’s not.”
Source: https://www.propublica.org/article/health-insurance-brokers-cost-commissions-bonuses
Cost Structure – Who is paying for that arena sponsorship? I can count on two hands the number of scenarios where commercial customers wanted to meet at my office. Typically, they find it more convenient to meet at their own locations. How much does a typical agency spend on real estate? Or company cars? Or sales trips, named buildings, and various sponsorships? Who is paying for all this? Obviously, it is the customer!
And ditto the management layer on top of management layer on top of management layer.
What if… by eliminating areas that fail to create value for customers, and by reframing all other items, like sales metrics, analytics, and financial models, so the customer is at the forefront of our thinking… Could an organization deliver improved value through more focused offerings and more responsive service at 35% less cost?
Metrics, Sources of Human Capital, and Fun. What if metrics were viewed as helpful and motivating? What would happen if business development teams viewed metrics/Key Performance Indicators as actually connected to their experience and that the use of such metrics was to sincerely help? If a business development team was hired for attributes of enthusiasm, competence, and extroverted personality types, could you redesign the thinking behind which metrics you are choosing?
What if the best business development people available to the agency marketplace are actually experienced, mid-career insurer personnel? Could we “light a spark” to create a team of articulate, competent, and excited colleagues? Is it possible that decades of corporate experience at BUCA is creating a “pent up” energy that we could release, creating value for clients and improving the lives of these executives? I think so, and I think such an organization and culture would impact, in a deeply positive way, the lives of these insurance professionals.
What if we could make work fun? Wouldn’t that help attract the right staff, influence the customer’s experience with our team, and ultimately create staff stability, improved customer retention/NPS, and therefore improved value for everyone?
I’ve seen where high performing teams, with superior personnel, are engaged with one another and doing great work. What if that culture and experience was the norm within an organization? Is it possible to both improve a customer’s “willingness-to-pay” and provide a vastly superior price to the client? Can the difference in “the wedge” be translated into freely offered testimonials and referrals?
Technology. What if technology innovation was embedded as a core attribute of a firm’s culture? Could all areas of an organization, from marketing to operations and finance to HR, benefit from a constant search for ways to improve the way the business operates, including through an ongoing review of available commercial solutions and proprietary technology, processes, and scripts? I experienced, through our past InsuranceSkout venture, how a retail agency could serve as the laboratory for commercial innovation and value; I recently modeled a scenario where we could improve operating leverage for a General Agency by 5x by deploying a custom software for proposal analytics and RFP management. What if our own organization became the fountain of ideas and proof of concept for a variety of insurtech innovations?
Corporate Development. What if aging insurance principals feel “stuck” between the choice of a below-market valuation and the “feel good” of internal agency perpetuation? What if aging principals feel they are wrestling with desiring strong valuations and the risk of disappointing junior staff, who would like the opportunity to try their hand at leadership? What if there is a way to supplement the transition from one generation to the next with an experienced management team that also supported the values and culture desired by the senior generation?
I have experiences and ideas for how to make all this possible. But can I find a partner with the experience, credentials, vision, network, and temperament to complement my own attributes? If I could, I wonder what we could do…
What if we built an organization that earned the position as the trusted advisor of choice for all sized employers? What if our culture and customer focus led to talent viewing our organization as the organization of choice amongst all insurance brokers and consultancies in the the United States? What if, by focusing so aggressively on customer preferences, the superior talent of our organization coupled with innovation positioned us to be the most responsive firm in the United States, delivering world class value, while offering a price point 35% below our global competitors?
Then, once we started building this, how would we get the word out most effectively?
To be continued…