What’s on Dec? | Episode 27 | Shifting brokerage ownership models

Stream this episode and others in our series on Spotify, Apple Podcasts and YouTube.

Consolidation in the Canadian P&C broker channel is reshaping career paths for broker producers.

Producers are thinking about their career options and paths to success differently than even two or three years ago, says industry veteran Randy Carroll, CEO of brokerage Ai Insurance Organization.

In CU’s latest What’s on Dec? episode, Randy talks about structured ownership models for broker producers and the importance of built-in guarantees.

In the wide-ranging discussion, Randy also shares his thoughts on M&A as well as talent retention challenges.

Text Transcript:

Intro | Jason Contant:

Hi, I am Jason Contant, Associate Editor at Canadian Underwriter and co-host of our podcast series “What’s On Dec?” For this episode, I sat down with Randy Carroll from AI Insurance Organization to discuss a variety of hot topics in the P&C insurance industry. We explored talent retention, M&A, and different career paths within the industry.

Jason Contant:

One of the things we wanted to sort of get into was talent retention. I’m sure you’ve seen a lot too with that, but I’m just sort of wondering, you know, how is talent retention faring in the broker channel?

Randy Carroll:

It has its challenges. You know, as far as talent and hiring, it is probably Number 1 or Number 2 in regards to what you have to keep your eye on on a day-today basis and it’s the pendulum that’s swinging the most. There’s lots of opportunity out there for those that are working in the industry, both from an administrative side, customer service side, and a sales side. Acquiring and keeping talent is probably one of the biggest challenges that we see, at least that I see, from the seat that I sit in, with the brokerages that I’m working with.

Jason Contant:

How do you go about then, like, sort of keeping people or attracting them even into the industry?

Randy Carroll:

Yeah, it’s a little different than what it used to be. You know, you’ve got those producers out there that want to come and take a look at potentially working with a brokerage. You’ve got some that are far and few between that are coming across that they’re looking for just a pure commission base. You’ve got some that are coming knocking on your door, or that you’re reaching out to, that are looking for commission, but they’re also looking for that draw on a month-to-month basis for some stability. It’s kind of all over the map in regards to but the availability and the shift, it’s vigorous. The dollar, in regards to compensation levels, has increased drastically over the past three years. And a lot of that I think is driven a little bit around mergers and acquisitions, but I think a lot of it has also been driven around those that are in my age bracket deciding that they don’t want to do this anymore. And there’s a lot more open availability. And, you know, you’ve got some seasoned professionals that are deciding to retire. It’s somewhat hard to replace that person with somebody that’s junior. You might take one and a half people to replace somebody that has been around in the industry for a number of years. So it’s a moving target that you really have to keep an eye on on a regular basis for sure.

Jason Contant:

Yeah. Yeah. And then I guess if we get into sort of M&A, ’cause you were mentioning that, what are you seeing really with that in the M&A space right now?

Randy Carroll:

Well, I think the M&A space has really driven a lot of the producer shift. There’s, you know, when M&A over the past, you know, five to to 10 years has traditionally been owned by the larger insurers. And, you know, there was a good segment of larger brokerages for sure. But even those brokerages, most of them I would say, were backed by large insurers. But albeit, I don’t think M&A is gonna really change much. I think we’ve seen a softening on insurer to insurer. There might be some wiggle room for another big announcement. But I think that’s fairly settled, at least for the short term. I don’t think we’re gonna see any big news from an insurer side. Brokerages, we see an announcement on a monthly basis, a major announcement on a quarterly basis, that’s not gonna go away. It is really nice to see that, you know, some of the larger brokerages are actually winning those acquisitions versus the insurers winning the acquisitions. But that said, you know, when it comes to producers and staff, that’s where the biggest part of the shift comes. And I think that’s where, at least from a producer’s perspective, we’re starting to see some definite change because you’re moving from what I would call kind of the non-corporate brokerage operation to more of a corporate brokerage operation. And there’s quite a few in that sales team that really like where they are because of the structure that they’re working under. And that shift to more of a corporate structure and a corporate environment is difficult for some. The contracts get under attack. There’s new terms and conditions because of the new owner. And, you know, I’ve seen a lot of brokerages and talked to a lot of brokers and given some advice in regards to those that are looking at making a shift. And it’s interesting. I would have to say that those that I’ve talked to on the producer side looking at making a shift are really seriously thinking about their options a lot harder today than they did two or three years ago. I think, you know, one of the best I’ve heard from one is, “I’m 51 years old, I don’t wanna do this again. This is my last move, I gotta make sure it’s a good one.” Right? Yeah, and they’re all looking for, not all of them, but most of them, are looking for a piece of the pie. You know, back in the day when I started on as a producer, you basically come in, you were glad to have a job working for a solid brokerage, and you knew that over the next five to 10 years, if you built a good book of business and you built a good customer relationship, maybe there was an opportunity to have an equity discussion, maybe there was an opportunity to get a little bit of ownership. That conversation has changed so much. Producers are now looking at, “No, I wanna make sure that I’ve got my future baked in here. I wanna know that I have that option baked in. I don’t wanna be able to, you know, leave myself at risk to have a conversation with the principal broker or the owner of the operation five years from now on a chance or an opportunity that might happen. I wanna know that if I can perform and I can follow the following or follow a path that’s kind of laid out in front of me, and I can achieve that, that I’ve achieved a goal, and I can work my way to the next step.” The conversation has changed a lot.

Jason Contant:

And like, so you got into the M&A, how it’s reshaping like producer career paths, right? And so what I’m thinking is, like, one of the things we discussed a little bit earlier, sort of offline was this whole idea of producer-to-owner models. And I wonder if you can sort of explain what that is and why these models are, I guess, gaining traction in your opinion.

Randy Carroll:

Yeah, I guess they’re gaining traction because the producer who puts in, you know, five, six, eight years, let’s use that person that I talked about that I had a conversation with, 51 years old. You know, let’s say he wants to retire when he’s 65. So I think my maths right, gives us another 14 years, right? So, you know, he wants to make sure that he has something more than a gold watch and a handshake 10 years from now. He wants to make sure that he has a guarantee built in that as long as he meets the following criteria, that that conversation’s not a conversation, it’s a guarantee. And you’ve got a number of brokerages out there and across Canada, I focus more on Ontario, so I’m more familiar with what’s happening in the province, but you’ve got a number of brokerages that are offering that type of agreement or contract to brokers who fit a certain mold. The ones that I’ve seen come with either a commitment in regards to a term, a commitment in regards to a gross written premium amount. Some of them come on specialty market and specialty or product specialization. And when you get one or two or, you know, maybe even half a dozen that are offering that type of arrangement, the mindset of the producer starts to change. And as you know, it’s a small industry and word travels fast, right?

Jason Contant:

And if we sort of unpack that a little bit too, like in terms of the economics, right? Like, what do you see as sort of the economic benefits from, you know, going independent versus joining like a structured ownership model?

Randy Carroll:

So if I come in on an ownership model, a certain percentage of the commission base, I’m gonna keep the certain percentage of commission base I’m gonna pay back to the brokerage that I’m working with, right? If I was to go independent, the cost of ownership would be a lot higher in regards to me doing it on my own. Because I’ve now got a shared cost arrangement because I’m in an ownership position with a partner versus an independent position where I’m paying for all the freight, right? So I’d have to pay for my errors and emissions 100%, my systems 100%, my staff 100%, my accounting, my bookkeepers, my CFO, all that stuff would be. So the difference, you know, I would say on average, you’re looking at a difference of anywhere between 18% to 24%, 26% depending on the operation. And that’s a lot of money coming out of my pocket, right? So the model I’m most familiar with is that a producer would own a good percentage, the larger percentage of the book, the brokerage would own the lesser percentage. But there are what I’ll call management fees that are paid on a month-to-month basis to kind of offset some of that cost, which makes sense to me. The bigger challenge there for a producer, so let’s say that you’ve got a producer who’s very well-seasoned. Let’s say he’s been working with a brokerage for 8 to 10 years, and he’s got a solid relationship with his customers. He also has a contract with that broker. And that contract, if it’s written well, is pretty solid around non-solicitation. So for that broker to make a decision to move from A to B, there’s a one-year tail there that’s gonna be really difficult. Because you’re moving away from a fixed income because of what you’ve built, right? Even though you don’t own it, you’ve still built it, into an opportunity where you can have ownership, but you’ve got one year of relationship that you’re gonna walk away from. And not to say that you’re gonna get that relationship back after 12 months, but you’ve gotta be very concerned and you have to be respectful of the covenants that you have in place based on the agreement that you’ve got with your current employer, right? So it’s not as easy as saying, “Well, I’ve got a deal over here where I can actually get ownership and I’m gonna pick up and I’m gonna leave. I got a family to feed, I’ve got a roof over my head, I’ve got a lifestyle that I wanna continue to live.” And where I have seen a shift over the past six to eight months is brokerages are now working with their lending partners to help bridge that gap to make it easier. So I think what we’ve seen in regards to the shift to a pure producer, to a producer with equity will actually ramp itself up over the next 12 to 24 months as a result of that.

Jason Contant:

Yep, for sure. And just so I understand, like how is this sort of producer-to-owner model different than the others, like the employee owned and that sort of thing?

Randy Carroll:

You’ve got a pure producer model where I’m coming in, I’m getting paid a base commission and a renewal, and that’s what I’m getting on a year-to-year basis. Let’s say I build my book up to a large book, I’m making really good money as a result of that. But if I decide that I want to leave, I want to retire, I have nothing because I have no ownership or equity in that book, right? That book is still owned by the brokerage I’m working with. I may be able to get to a point in my career where I’ve made a deal with the broker that I’ve worked with that I may be able to pick up 25% ownership. I may be able to pick up 50% ownership. But the equity models that I’ve seen out there today where I step in as an equity partner based on certain conditions, the ownership percentage is, I’ve seen them where the ownership percentages are as much as 100%. I’ve seen them where they’re 80%, I’ve seen them where they’re 60. So for a broker to have a large book of business 10, 15 years from now, decide that they’re gonna pack up and retire, having a 80% ownership on a book of business is a pretty good retirement package at the end of the day. If I had any broker come to me and, you know, just ask for advice, you really have to take a look at, I call it, maybe it’s not the right way, but I’m just gonna tell you the way that I call it. You really gotta take a look at the divorce clause, right? Like, if things don’t go well, where are you? How do you exit and can you exit smoothly, right? That’s a really important part of any contract. I’ve seen contracts where a producer, as a really good example, had ownership, and they turn around and they’re at odds. They’re not having a good time with the brokerage that they’re working with. The brokerage either wants to part or the producer wants to part. And I’ve seen a producer pick up and move. “Yeah, I’ve got ownership, it’s baked into my contract.” But there’s nothing in that contract that says the brokerage has to help you move that book. So now you’re out on the street, you’ve found yourself a new home. But now faced with, “Wow, I’ve got a lot of work to do over the next 12 months because yes, I own that book, but I’ve got no way of transferring that book to this brokerage because that wasn’t negotiated.” So you really gotta take a look at… You know, it’s easy to enter into an agreement where you’re putting yourself into a good financial position, but you’ve also gotta really take a hard look at what does that agreement look like if things don’t work out, and what are my exit options, and how easy is it to move?

Jason Contant:

Yeah, no, that’s a good point for sure. And you mentioned earlier the covenant aspect, right? Like non-solicit and that, and I know the courts look at that differently and they want it to be very specific, right? Like, a lot of people are like, “Oh, you can’t do this in the city of Burnaby, the whole city. And it’s like, no, I live there, right? So you’re gonna have to do that, but it has to be very specific. And so that I think is interesting too because there’s a lot of cases with that where it’s kind of like a broker who owns the book, right? And then if it’s not written, those non-solicit agreements aren’t written well, then it’s thrown out sort of, right?

Randy Carroll:

Yeah, well, it’s thrown out after 90, you know, maybe 90, maybe $150,000 invested in legal fees back and forth, right? But yeah, you are right. You know, you’ve gotta be reasonable in anything. I always look at it this way, you know, at the end of the day, if a brokerage owner and a broker producer don’t see eye to eye and they wanna part, they still wanna have coffee, they still wanna sit down and be able to socialize, they wanna be able to go to a broker convention and still stop and have a chat and talk to each other, right? So you’ve gotta do everything you possibly can to make sure that it’s fair for both parties. A messy divorce isn’t good, right? So make it as clean and easy as possible so that everybody can get back to work and back into doing what they wanna do on a day-to-day basis and get back on with life.

Outro | Jason Contant:

That wraps up today’s episode. We hope you enjoyed the discussion. Thanks for tuning in and we’ll see you next time on “What’s On Dec.”