Tom Golub, CEO of Beecher Carlson, says the marketplace has developed into a free-agent market where brokerage firms have to earn the loyalty and commitment of customers.
Risk & Insurance® writer Thomas Slattery recently met with Thomas A. Golub, president and CEO of Beecher Carlson, at the broker's Atlanta headquarters. The conversation ranged through the fallout from the Spitzer probe to marketplace trends.
Tom Slattery: What are the main marketplace dynamics today for brokers?
Tom Golub: The assets we command are the talent we hire and the technology solutions we put in place.
We want to be transparent to people thinking of careers at Beecher Carlson-- what the opportunities are and how the company operates culturally. We want to be clear about this, so the week after people join they're not surprised. We want to make clear what we do for clients and what services we're not prepared to deliver.
The global marketplace is more dynamic than it was 20, even 10, years ago. It's a free-agent market. You earn commitment and loyalty every day. It begins with the interviewing process. For some, our environment, which is very hard-charging, is really attractive; for others this would be the wrong place.
The movement of people on the brokerage side, and back and forth from brokerage to underwriting, is unique in the last 10 or 15 years. In the 1980s and 1970s, that wasn't so. The marketplace (now) is pretty broad for any broker to recruit from.
TS: The second dynamic you mentioned was technology solutions.
TG: The attention (coming off the Spitzer investigation) has been on contingency commissions. That's a narrow part of a broader issue, transparency of the entire transaction: the way forms and policies are negotiated (among customers, brokers and underwriters), and the way documents get transmitted, issued, and the way agreements get memorialized. Customers have begged for transparency around that issue forever.
Technology is clearly the solution. There have been massive barriers, mostly the legacy systems built up over decades, particularly on the underwriting side. A number of companies have raised money to solve this problem with stand-alone technology companies to move information more rapidly.
In a purchase-sale agreement in most major businesses, the day the closing is done, all the file documents are issued. In insurance, the file documents may not get issued for six months. Why? It's all about technology. There's an opportunity to solve that problem, and the key is the intermediary, who touches the customer, the underwriting and the policy side of the business.
TS: What else?
TG: A couple of things. In smaller account business, carriers have a decreasing appetite to deal with lots of independent agents, which has forced rapid consolidation among smaller agencies, those with $5 million or less in annual revenues. That's a trend we see continuing, driven by the fact that the underwriting companies (want to be) more efficient. Their total administrative costs in the past might run at 40 percent of the premium that came in. To be competitive now, they've got to operate in the high 20 percent range, so that takes away the opportunity to deal with lots of agents.
On the opposite end, there's a trend for the largest companies to do business with (smaller) vendors. For Beecher Carlson and folks like us, anybody other than the big three, we've found more receptivity than we'd have found five years ago. This trend is being driven by demands on the customer side that are more specific and require more expertise. The risk management departments of many of these customers are also getting squeezed, so they have to put more of a burden on their service providers to do the heavy lifting. To do the work in complex industries, you've got to have industry expertise. So they're open to meeting with us, they're open to providing us with opportunities to provide specific services to their accounts.
My experience in the 1980s and the early part of the 1990s was that the trend was going away from the smaller broker and toward the larger brokers. We've now seen that position inverted.
TS: You say companies want more transparency. What's their driving force?
TG: Lack of it causes friction through the entire transaction. We need more transparency at the time the risk is bound. Now, it's not good for anybody. There's no upside, only downside. The frictional cost is huge. The underwriters want the problem solved nearly as desperately as the customers do. The companies needed someone to step into that gap. We've started to facilitate the solution with a software product called Novus, which makes the entire transaction transparent.
TS: Customers have been screaming for transparency for some time?
TG: There's a correlation between the size of risk and the customer, and how important transparency is to that customer.
At the smallest end, the local retail store that's spending $10,000 a year on insurance premiums wants to know what its premium and coverage is in layman's terms. They don't want any surprises.
At the other end, the largest customers and professional risk managers whose job it is to understand in a very precise way exactly what they're paying for and who is receiving the money, want to know where the money flows and how it flows. At the higher end, there's a great sensitivity to transparency. They want to know the wording in the contract, not layman's terms.
TS: Any further comment on the Spitzer probe?
TG: It has been a healthy exercise for the industry. It has caused the industry to examine its practices. The contingency issue has been highlighted, reviewed, digested and reacted to. We've learned a lot about what the customer sensitivity is. We've learned that the big customers care a lot. They want to understand exactly how the broker gets paid, and they want every bit of it transparent. In the agency business, we see contingency commissions in small commercial business to be a permanent part of life. It's been around as long as the industry has been around. We expect it's going to stay around.
April 15, 2006
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