Business Breakdowns
· Aaron Cohen
I'd say what's unique in this industry or what's changed over the last 20 years is what I mentioned is their ability to embrace technology and data. Now that being said, there's still a long way to do that. I think this industry is still behind many others. And second, what's changed is these brokers have become bigger and they've been able to have more influence over their insurance carrier partners. So what does that mean? That means that you could drive better commission rates, you could drive better contingent commissions based on volume levels. It's allowing the broker to have a real seat at the table where not too long ago, in the mid-80s—maybe that's a long time ago now, maybe the mid-90s—insurance brokers were small, but back then they didn't have the ability to influence their financial situation. Now they do. Because if you think of an insurance broker and they're putting billions of dollars of premiums with a certain carrier, they are really reliant—they being the carrier—on the broker and their ability to bring them business, which should drive more value to the broker. And I'd say just generally speaking, another reason why insurance brokerage is so fantastic is because we believe in financial services, the person who owns the customer relationship should be able to drive more value out of the entire ecosystem. And brokerage is a perfect example of how that's evolved over the last 20 years.
· Matt Reustle
[00:00:00] S0: To that point. On the carrier-broker relationship, you could in theory have carriers underwriting, talking to customers themselves. I think you certainly do still have that direct selling out there. But has there been a material change just in the percentage of the market that's represented by brokers over time? Has that been a share gainer or a tailwind for the market?
· Aaron Cohen
[00:00:00] S1: So you have to split up the industry: personal lines and commercial lines. Of course we all are familiar with the very successful direct-to-consumer personal lines of GEICO and Progressive. They have taken market share away from brokers over the last 20 years. That being said, their market share growth has slowed recently. On the commercial side, you don't see—we call it consumer, but direct-to-the-business relationships from the carriers. And there's a lot of reasons for that. But most importantly it's because the insurance broker plays a very important role that some people don't appreciate. And that's an advisor. If you're a mid-sized business or a family business that has 20 trucks that does short-term deliveries around a certain geography, your entire family's net worth is tied up in that business. And the one thing that could bring that down is not having the right coverage, not having the right liability coverage if one of your drivers gets in an accident, not having the right coverage if one of your drivers is hurt, not having the right coverage if you ruin some of the product that's on your truck. So the CEOs and leaderships of these small and mid-sized businesses value the insurance broker's advice. They value their advice around deductibles, what insurance they need, what insurance they don't need. And I think another aspect of insurance brokerage that's evolving is specialization. Because a lot of industries are becoming more and more regulated and your insurance broker really needs to understand and follow the industry to be able to evolve your insurance and make sure you have the right protection. And that is something that has been driving the consolidation in this industry, especially for the last 10 years. And our investment at Assured Partners, this was definitely one of the drivers of the success is we had centers of excellence. So the traditional insurance broker—think of a small to mid-sized town—they're insuring everyone on Main Street, they're insuring the barbershop, they're insuring the plumber, they're insuring the person who owns a bunch of trucks to deliver on behalf of Amazon. And they're truly generalists. And now what has happened is they don't have the expertise to be able to change their advice based on small changes in a specific industry because they're just too busy.
· Aaron Cohen, Matt Reustle
So if you think about something at Assured Partners, we had long-term care facilities. That industry is driven by Medicare and the payers. And as you know how complex the health insurance industry and just health in general is in our country, you need someone who really understands the industry, understands if you're taking on Medicare patients, are there certain types of insurance that the government mandates you to have. And therefore the specialization in this industry is what's driving the acquisition flow as well. And when you look at that, you see a tremendous opportunity because what happens is retention goes up with your customers. And retention has always been fantastic in this industry. But the generalists have high 80s, low 90% retention. The specialists, they're in the mid to high 90s because they understand your business. [00:00:00] S0: And when you think about that specialization and how it would translate to the bigger businesses, maybe the acquirers of businesses. In your mind, is the ideal insurance brokerage one with several segments each with their specialists in those categories, or is it pure play where it's a business and while it might have scale, it's specialized in one specific line or insurance type?
· Matt Reustle, Aaron Cohen
[00:00:00] S0: And when you think about that specialization and how it would translate to the bigger businesses, maybe the acquirers of businesses. In your mind, is the ideal insurance brokerage one with several segments each with their specialists in those categories, or is it pure play where it's a business and while it might have scale, it's specialized in one specific line or insurance type? [00:00:00] S1: You know, Matt, what's funny is I joke internally at GTCR. I love insurance brokerage because of one word: diversification. And I mean that across every aspect of this business. Insurance brokerage, you need to be diversified across carriers, you need to be diversified across customers, you need to be diversified across producers, and you need to be diversified across end markets. So you can have multiple specialization focus within one broker. And I think that builds a better, more sustainable business. [00:00:00] S0: When you are stepping into an insurance brokerage business and you're thinking about laying out the plan of attack, can you talk a little bit about if there is a playbook or if there is a strategy ranking what you're typically looking to do alongside that leader that you're either putting in place or that is already there?
· Aaron Cohen
[00:00:00] S1: So I'm going to go back to the last question, which used the word diversification. We don't want to invest in an insurance broker that is highly dependent on one carrier or one broker. You'll see that a lot, especially in the small acquisitions we've done in the past where two or three brokers basically are the entire business. They own all the customer relationships. Then you're just reliant on those people. And the question really becomes: who owns the business? Is it you or the broker who owns the customer relationship? So we want some level of diversification. Number two, I'd say we're looking for some basic centralized infrastructure. They have the right agency management system, they have the appropriate technology to support the brokers. We'll invest in that. But if you're looking at a specific broker, you want them to have that. And then most importantly, it's all about the people. This is a business where we don't have machines making widgets. We have people, human beings with emotion and personal lives who have to go out and satisfy our existing customers and win new customers every single day. And you need to have great leaders who understand that and know how to work and partner with the brokers and the entire organization to be able to drive success. Because if a broker's unhappy with his job or something's going on in his life, we all have had good days and bad days. Machines don't have emotion. It's wonderful. They just keep on plowing along. But here it's all about having CEOs and regional leaders who have great EQ and could partner with their sales folks and people in the market to be able to drive business.