Fishing for New Business

What continues to impress me as I meet more and more broker partners is the innate power of the broker distribution channel. No other channel can buy insurance for their clients. Only an independent broker can truly offer consumers the best product at the appropriate price. This is a significant competitive advantage that brokers can and should continue to leverage as they wage the war of product distribution often against the very partners they support.

Watching this battle deepen, I have made it a point to travel into the trenches to see first-hand what brokers are facing. During the past two and a half years, I have travelled across Canada and had the pleasure of visiting more than 80% of the broker’s offices with which Pembridge is contracted. By the end of 2008, I expect to have personally visited every main and or key office of every Pembridge broker partner.

Throughout my travels, I have taken advantage of the opportunity to sit down with broker principals and customer service representatives to hear first-hand what is — and what is not — working in their markets. This interaction, along with the work our regional directors and broker sales managers do in the field, has resulted in the implementation of several of our brokers’ recommendations. Following through on these suggestions is the right thing to do to support the maintenance of broker independence.

Unfortunately, the threat to independence continues at an alarming rate. What’s more unfortunate, the threat is primarily from companies masquerading as supporters of the independent broker, whereas in fact they are aggressively exploiting alternative ways to grow their business.

For example, there has been an increase in portfolio acquisitions, fuelled by inducements such as override and financial compensation. Excessive portfolio acquisitions within an office shrink the stable of companies from which a broker can choose and marginalizes consumer choice, ultimately devaluing the brokerage.

TRANSFERRING PORTFOLIOS

From a strategic standpoint, portfolio movement by a broker makes sense; Pembridge does not oppose any actions an independent businessperson takes to foster perpetuation of his or her enterprise. But Pembridge will not induce a transaction or acquisition by providing financial incentives that effectively “buy” the transfer of business. If a broker chooses to transfer all or part of a portfolio to Pembridge, the necessary financial support to offset broker costs will be provided to ensure a smooth and seamless migration.

Pembridge is committed to opening doors and creating enduring relationships that ultimately foster growth. That’s why one of the key discussions I am having with our broker partners of late is about maintaining the right balance of markets within the office.

The right balance has two equally important aspects. The first is the number of partners a broker has. The second is the relative size of each of the partners to the broker’s operation. Striking the right balance of markets is a fundamental aspect of retaining independence and protecting the future by leveraging all partnerships to your advantage. In this context, for most brokers, two critical questions need to be answered: who are the right partners to have; and how much business should each market be given?

First and foremost, the right balance of partners begins with a stable of companies that support the independence of brokers — companies that are sincerely interested in creating a healthy long-term picture for the broker. Over the past few years, consolidation and market softening have combined to blur the lines between companies supporting and promoting independent brokers and those that continue to create bigger ‘captive agent’ channels. If a traditional broker company wants to go ‘direct,’ then go. It is time to stop muddying the waters.

A BALANCING ACT

Second, once a broker has established the right balance of markets, it is important to consider how much business each of those partners should receive. If a broker has several companies of a similar size from which to choose, the broker is less exposed to the impact of consolidation or re-underwriting. On the other hand, when companies have a significant share of the broker’s business, each are protected from the volatility large losses can bring to a smaller book of business within a broker’s office.

Creating the right balance in terms of the size of companies and how much business they receive protects the broker and creates more stable markets for brokers to choose from on behalf of their customer. Without such stability, the consumer may not always be presented the best product at the appropriate price, which is the advantage brokers provide to customers.

One of the biggest obstacles a broker faces in striking the right balance is consolidation. In the past several years, consolidation has tightened its grip within the industry; brokers are feeling the impact. The price of brokerages has increased and brokers’ ability to expand their influence in their community has been stifled.

Historically, brokers have competed with other brokers when looking to expand through acquisition. In most cases, brokers had relatively similar time frames for the payback of the required investment, so a relatively stable market was created and well-defined price ranges were established.

But once insurance companies entered into this market, pay-back periods were extended and costs went up. In the short term, this was acceptable for the selling broker. But over the long term, smaller independent brokers simply cannot compete with the multiples certain insurance companies are prepared to pay to buy up market share. The longer this continues, the greater the threat to the many entrepreneurs who have formed the backbone of this channel.

Pembridge will continue to do its part to promote and preserve the independent broker. But brokers must also play a role by ensuring that no one company dominates their book of business. If there is an imbalance, and a broker recognizes a strategic partner is under-represented, then it is entirely appropriate for a broker to consider moving a portion of the business.

In doing so, the broker not only has more access to all markets, but also retains more control. Brokers have earned the right to be in the drivers’ seat when they are mapping out their future. They deserve not to be unduly influenced by financial incentives. At the same time, the proper balance gives the broker more options in working with its partners should acquisition opportunities arise. It gives the broker some leverage in helping to compete against companies that simply want to drive the independent broker out of business.

THE ROAD AHEAD

One way Pembridge is trying to counter the creep of consolidation is through the offering of its partial portfolio rollover program. Pembridge has worked with many brokers to ensure they are not too heavily dependent on just one or two markets. The success of the program has not only helped established balance within a broker’s office, but has also provided customers in many cases with better coverage at the same or less cost.

Pembridge is also providing brokers with no-obligation financing options, in which brokers can access funds loaned at commercial rates to help pursue an offensive strategy of acquisition, a succession perpetuation or to remove an equity partner.

Pembridge firmly believes the way to grow over the long-term lies in a commitment to independence and consumer choice. That’s why it will continue to be very active in helping brokers create the right balance of partners within their office. By doing so, it will provide every opportunity for Pembridge’s current and future broker partners to grow, prosper and remain independent, while ensuring that consumers continue to receive the professional expertise and service that brokers have been providing for over a century.

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Once a broker has established the right balance of markets, it is important to consider how much business each of those partners should receive. If a broker has several companies of a similar size from which to choose, the broker is less exposed to the impact of consolidation or re-underwriting.