Brokers Cheer NARAB Passage
After many years of intense lobbying, insurance agents and brokers finally have a national licensing clearinghouse.
Legislation signed into law by President Obama on Jan. 12 as part of the extension of The Terrorism Risk Insurance Act (TRIA) established the National Association of Registered Agents and Brokers (NARAB II) to make it easier for brokers to sell insurance on a nationwide basis.
NARAB II, commonly known as NARAB, was established as a permanent organization.
Proponents of NARAB, a nonprofit membership organization to be governed by state insurance commissioners and insurance market representatives, argued that the group will preserve the best of the state regulatory system while adding a more effective licensing system.
“NARAB means a much more efficient and streamlined licensing process for agents and brokers operating in multiple states,” said Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices (NAPSLO).
“NARAB is a tremendous and effective reform while preserving the state-based regulatory system,” he said.
A National System
Keri Kish, NAPSLO’s director of government relations, added that currently its members, or any broker or agent, has to be licensed in their home state, but if they do business in other states they have to obtain a separate license in each of those states as well.
“There will still be stringent requirements to become a NARAB member. But once those requirements are met, it’s just a much more simple online, one-stop shop to get licensed nationally.” — Brady Kelley, executive director of the National Association of Professional Surplus Lines Offices
“With NARAB, what they’ll be able to do is get their license in their home state and then apply to NARAB,” said Kish. “If they’re approved for NARAB membership, then they would be able to operate on a national basis.”
Added Kish: “They would still have to pay the same fees so there’s not necessarily a reduction in fees they would pay to get the licenses, but it’s a huge reduction in the amount of time and ease of being able to operate on a national basis and not having to administer 50 separate licenses.”
Kelley noted that if the agent meets the NARAB membership criteria, they will be able to log onto the national system, meet the qualifications, submit a background check and receive a national license.
“There will still be stringent requirements to become a NARAB member,” Kelley added. “But once those requirements are met, it’s just a much more simple online, one-stop shop to get licensed nationally.”
John Prible, Washington, D.C.-based vice president of federal government affairs for the Independent Insurance Agents & Brokers of America (IIABA), said NARAB will help companies by increasing their distribution force across the country and it will help consumers by increasing competition.
“But also a point that should not be lost, and it’s actually a very important point, is that now more than ever consumers will not be tied to one location,” Prible said.
“People move around, they move from state to state, people buy second homes in different states and they might have businesses in other states as well. What this will allow them to do is to continue to rely on their trusted insurance agent no matter where their business or property is.
“So we anticipate that NARAB probably won’t go live for about two years. We want to make sure we get it right.” — John Prible, vice president of federal government affairs, Independent Insurance Agents & Brokers of America
“That agent or broker will be able to utilize NARAB in order to operate across state lines without having to get 50-plus different licenses from the various states in which they operate.”
NARAB is expected to increase competition among agents and brokers nationwide.
“The important reason competition will be increased is because now there will be a greater number of agents and brokers that consumers can choose from,” said Prible.
“Consumers don’t just have to choose among the insurance brokers and agents in the place where they’ve moved or where they expand their small business across state lines, they can keep their current broker.
“But if another agent comes in there and offers better service or better value, then they can move to them,” Prible said.
Joel Wood, senior vice president of government affairs for the Washington, D.C.-based Council of Insurance Agents and Brokers (CIAB), noted that “for all the histrionics over state-versus-federal aspects of the NARAB discussion, the reality is that NARAB is simply an administrative mechanism to facilitate multi-state licensure.
“It is a red-tape cutter that will save significant costs for agencies and brokers large and small,” Wood said. “I know of many small firms who employ full-time staff just to maintain all their firm’s non-resident licenses.”
IIABA’s Prible stressed that NARAB will not be up and running overnight.
“The single most important thing that we’re trying to tell our members right now is that even though we’ve been working on this for the better part of a decade and we’ve finally crossed the finish line, this is not just a switch that’s going to be flipped,” Prible said.
“The president is going to have to appoint a board of directors,” Prible said. “This board will have to meet and develop the bylaws for exactly how NARAB is going to work. So we anticipate that NARAB probably won’t go live for about two years. We want to make sure we get it right.”
Top P&C Brokers Ranked
A first-ever ranking of the world’s top 150 brokerage groups by revenues earned from commercial non-life (P&C) insurance has been calculated by London-based market research firm Finaccord.
The top 150 brokers earned total global revenues of $28.5 billion from commercial P&C activity — or 59 percent of the estimated $48.5 billion total global revenues in 2013, according to the firm.
Aon ranked at the top of the list, with commercial lines revenue of $6.1 billion worldwide, followed by Marsh at $5.1 billion.
Overall, the top 15 brokerage groups together earned revenues of $20.9 billion (or 43 percent) of the worldwide market.
Finaccord’s research also showed that across the world’s top 150 commercial non-life insurance brokerage groups, 67 (45 percent) were headquartered in the U.S., with a further 24 based in the U.K., 14 in France, 12 in Germany and eight in Canada.
“The strong presence of North American brokers in the ranking is primarily due to the huge size of the U.S. and Canadian commercial property and casualty markets, and the fact that brokers, including independent agents, dominate distribution in both the U.S. and Canada,” said Bernd Bergmann, a consultant at Finaccord.
The Finaccord ranking of top 15 commercial non-life (P&C) insurance brokers by estimated commercial non-life broking revenues in 2013, in order, are:
- Aon: $6.1 billion
- Marsh: $5.1 billion
- Willis: $2.05 billion
- Arthur J. Gallagher & Co., $1.2 billion
- Wells Fargo Insurance Services: $960 million
- BB&T Insurance Services: $932 million
- HUB International: $932 million
- JLT Group: $878.6 million
- Lockton: $791 million
- Gras Savoye: $464.7 million
- USI Insurance Services: $390.4 million
- Brown & Brown: $382.4 million
- Alliant Insurance Services: $288.2 million
- Towergate: $267.7 million
- OAMPS Insurance Brokers: $210 million
Mike O’Connor, CEO of Aon Risk Solutions in Chicago, said the magnitude, complexity and speed of risk are increasing everywhere.
“Even without the uncertainty that is caused by natural catastrophe, economic slowdown, or legislative and regulatory changes, companies are operating in a challenging environment where the pace of change is unparalleled,” O’Connor said.
“Protecting people and property has become more difficult,” he said. “Clients want solutions that will enable cross-border trade and alleviate security concerns in addition to solutions that will help them seek rapid recovery and capital after natural catastrophes.”
Bergmann noted that “a number of large brokers in North America are driving their growth through acquisitions, while the majority of their counterparts in Europe rely more on organic growth.”
“I would say in terms of M&A activity, it is still quite patchy,” said Martin Mankabady, London-based partner in the insurance group at international law firm Clyde & Co. “We still haven’t hit the levels of activity we saw prior to the global financial crisis.
“In large part that is due to lack of confidence and market sentiment. The M&A market is particularly sensitive to that, and with the tensions at this moment in the world, plus talk of certain economies slowing down, all of that inevitably has an impact on M&A.”
He said “real pressure on income and margins being squeezed” has led some brokers to be active in the M&A market. Also driving M&As are brokers looking to achieve greater scale and what they hope will be more clout in the market.
“You can’t help but think that [the small and midsize] market should be ripe for consolidation — that could help them achieve some economies of scale and to potentially be more competitive,” said Mankabady.
“But we haven’t seen that wave of consolidation though there is some talk of it,” he said. “You may see a ripple of consolidation, but I’m not sure it will be a wave.”
He noted that “a number of sellers don’t want to sell unless they have to as they’re worried about not getting the right price, and buyers are worried about overpaying.”
Acquisitions Fuel Growth
Finaccord noted that 61 of the 150 brokers made at least one acquisition relevant to commercial brokerage business lines, and 10 made at least 10 such acquisitions between January 2012 and June 2014.
UK-based Towergate ranked first with 48 acquisitions, ahead of Arthur J. Gallagher & Co. and HUB International with 43 each, USI Insurance Services with 27 and AssuredPartners with 26.
“The global ranking may see some important changes in the future if competitors such as Arthur J. Gallagher & Co., HUB International and Towergate continue purchasing other brokers at such a rapid rate,” said Bergmann.
“In particular, given some of the acquisitions announced recently by Arthur J. Gallagher & Co, which include Noraxis Corp. in Canada and The Oval Group in the UK as well as OAMPS Insurance Brokers, the U.S.-based brokerage may substantially shorten the gap to Willis which is currently ranked third,” said Bergmann.
Commercial Lines Revenue Breakout
For a majority of the 150 brokers in the ranking, commercial non-life insurance is the most important source of revenues.
Of those 150 brokers, 22 of them earned more than 90 percent of their total revenue from commercial lines in 2013, while this activity made up at least half of the revenue for 122 brokers.
When ranked according to the proportion of commercial non-life brokerage revenues secured outside of their home market, Willis came in first with a figure of 90 percent in 2013.
Willis was followed by Howden Broking Group (80 percent); JLT Group (78 percent); and RKH Group (74 percent), meaning that the top four groups by this measure were all UK-based firms.
In total, nine groups earned more than 50 percent of their commercial non-life brokerage revenues from international markets in 2013.
Finaccord is a market research, publishing and consulting company specializing in financial services. It provides information about activity in the UK, Europe and globally.
Leading on Compliance
There has been a long-standing debate about where compliance responsibilities should fall in an organization, but with the spread of enterprise risk management (ERM) in particular, corporate risk managers are increasingly being seen as the natural owners of compliance.
“I like to use an umbrella as the analogy for ERM,” said Grace Crickette, senior vice president, chief risk and compliance officer for Emeryville, Calif.-based AAA Northern California, Nevada and Utah. “Compliance comes under it because non-compliance is a risk event.”
“The focus of compliance is on governance whereas ERM looks at risk holistically as the ability of the organization to identify, manage, monitor and mitigate corporate risks,” Crickette added.
In the compliance realm, risk management can help all departments that have some compliance responsibilities on a particular regulation to coordinate with each other.
“One of the advantages risk management has over individual departments in an organization is that they have a bird’s eye view of the complete organizational structure and who is responsible for what,” said Elizabeth Carmichael, director of compliance and risk management at Five Colleges Inc. at Mount Holyoke College in South Hadley, Mass. “This approach can ensure that everyone is brought into the compliance conversation who should be there.”
David Theron Smith, divisional vice president, risk management for Charlotte, N.C.-based Family Dollar Stores Inc. sees two key types of compliance in an organization.
The first is regulatory compliance, which is, no bones about it, compliance that you’ve got to do or you’re in violation of some statute.
Then there is what he calls corporate compliance, which is not necessarily dictated by statutes but by processes or procedures in support of corporate strategic initiatives.
“Corporate compliance speaks more to making sure we are executing a strategic risk management initiative in the organization or a strategic process within a department in support of the mission,” said Smith. “Perhaps you could call this ‘corporate brand compliance.’ ”
In a mature, sophisticated organization, risk management is understood to be very strategic rather than compliance or audit driven, Smith added.
At Pleasanton, Calif.-based supermarket chain Safeway Inc., Vice President of Risk Management William Zachry sees himself and his team as “enablers” of the company’s compliance network.
“We’re working very closely with them but they have to own it,” he said. “My team’s job is to make sure we provide compliance with enough data and information so they’re able to have the right level of resources to focus in on the compliance requirements.”
Zachry said he doesn’t want to go through the field “whacking the people who are bad, I want to make sure we enable the people who are supposed to be doing it correctly to get it done properly.”
When risk management is functioning properly to solve compliance problems, one of its great advantages is its ability to quickly and smoothly form multi-program task forces to identify and mitigate compliance risks.
A Bridge Between Departments
At Rochester, N.Y.-based Paychex Inc., one of the first companies to put the compliance function under the risk function, one of the values of ERM gathering together individuals from various departments is that they share best practices, almost in peer group fashion.
“So let’s say you’ve got a credit manager, or a collections manager, or a compliance manager or an operating risk manager and if they’re working together as a team on a problem — many times, even though they come from a different risk family, the solution to go after that risk is similar,” said Frank Fiorille, senior director of risk management for the company, which provides payroll, HR and benefits outsourcing solutions.
Five Colleges’ Carmichael added that the risk management department can serve as a bridge between divisions and departments to insure that all of the compliance requirements are appropriately addressed within the institution.
“Where third-party [non-governmental or audit] complaints or claims arise from compliance failures, particularly those that involve students or visitors to the campus, one cause can be communication failures between divisions and departments,” she said.
Fiorille said that an enterprise risk management discipline that includes compliance considerations “forces you to take all these risks in a funnel per se and then they go through a pipeline and then you’re categorizing them all and you’re rating them based on impact and probability and velocity and all this other stuff so it then spits out a risk heat map, so you can see which are the big ones you want to go after versus the little ones that pose very low risk.”
Although Paychex is not as heavily regulated as a bank, its products and risk challenges are similar to a financial institution, he said.
“So it seemed logical to bring together groups that are looking at the regulatory risks to team up with folks looking at credit risk and operating risk and reputational risk and the other kinds of things we manage on a day-to-day basis,” Fiorille said.
Risk management has an advantage over compliance in two important ways: access to top management and access to money, said Glenn Klinksiek, knowledge center content manager for the Bloomington, Ind.-based University Risk Management and Insurance Association (URMIA) and former assistant vice president for risk management and audit at the University of Chicago.
“I think risk management might be better situated organizationally to advocate for more dollars to get better compliance.” — Glenn Klinksiek, knowledge center content manager, University Risk Management and Insurance Association
“Often, risk management departments have access to senior management and that’s where oftentimes improvements need to be pushed from the top down, so that’s an advantage risk management departments have,” Klinksiek said.
Also, risk management departments are more often than not involved in the financial function of an organization.
“And compliance often means increased expense for whatever fixes are necessary and so sometimes in looking at ordinary department budgets there might not be an appreciation for what the importance of the increased expense is,” Klinksiek said.
“I think risk management might be better situated organizationally to advocate for more dollars to get better compliance,” he added.
Carmichael stressed the value of an ERM-type approach in establishing clear lines of communication within an organization.
“Clear communications across the board is one of the most important things that risk management can do, to make sure that different departments are talking to each other,” she said.
Smith noted that the success of ERM depends on ERM’s broad acceptance by all business silos within the organization and the recognition of the value ERM brings to each business unit, to the corporation’s bottom line and the corporate brand.
But too many organizations still view ERM as a compliance-based, audit-based function, he noted. “It becomes a ‘check the box’ exercise, something to get through, to make internal audit and the board of directors happy rather than driving a daily way of management and business execution,” he said.
Smith added that he believed the heart of a successful ERM initiative is grounded in a collaborative relationship between risk management and internal audit, with risk management taking the leadership role because it has the overall risk management experience, resources, understanding of the financial impact of decision-making and strategic risk program development.
Managing risk on an interdepartmental basis is an important part of the job, Fiorille said.
“Risks are continuing to evolve and change and rarely, if ever, fit squarely into one discipline, so it’s critical to ensure your risk apparatus can adjust and adapt as needed,” he noted.
If you’ve got one group responsible for looking at regulatory risk and another that’s managing all the other risks working collaboratively, from a flow and synergy standpoint it just makes sense, he said.
ERM is particularly helpful because it can be applied to help a risk manager effectively manage compliance and regulatory risk on a frequent basis, which is essential given the pace of regulatory and technology change, Fiorille said.
“Compliance risks sometimes can go to the top of the list so you can shift resources or put some focus on that risk versus some of the other risks,” he noted.