In Wholesale Distribution, Growth Is Propelled by Specialization, Talent and Tech
An expert panel distills the lessons of the Best Review–AM BestTV series on entrepreneurial agents and brokers.
- Best’s Review Staff
- January 2021
David Stegall, Risk Consulting and Expert Services
Skip Hagerty, Philo Smith & Co.
Ben Johnson, Liberty Mutual Insurance
For many agents and brokers, creating more valuable businesses often means moving to the ranks of wholesalers—brokers who act as intermediaries between insurance carriers and retail brokers. But the age of the generalist is fading, according to panelists in the closing presentation of a joint Best's Review–AM BestTV presentation, “The Entrepreneurial Agent/Broker.”
“The M&A market for insurance distribution has been very robust over many years. The industry is still quite fragmented, which is good from an M&A perspective, and buyer demand is exceptionally high,” said Skip Hagerty, managing director and partner, Philo Smith & Co. “From a buyer's perspective there's a strong demand for talent and scale coupled with specialization.”
Panelists agreed with Pat Ryan, founder of Ryan Specialty Group and founder and former head of Aon, who said in the initial broadcast of the series: “It's about specialization. Our approach to it, as I'm sure is quite common in the industry, is that we look for the top intellectual capital in specialty lines. It's all about getting that talent, attracting them, retaining them, helping them develop, empowering them, supporting them, and then we split it into verticals, practice groups.”
Technology indeed is a great blessing but can sometimes be a curse on the agent or broker’s perspective. It’s the thing that keeps them up at night. The reason why is cyberrisk.
Risk Consulting and Expert Services
David Stegall, principal consultant and founder, Risk Consulting and Expert Services, said the push toward specialization runs across all levels of distribution.
“The market is now moving to specialization, particularly with the marketing distribution system of MGAs, which I consider part of the wholesale industry,” Stegall said. “People are doing what they're best at. The risk-takers are not necessarily the underwriters. The underwriters are not necessarily the claims handlers, etc.”
“We see the era of specialization in the wholesale market driving more activity toward the wholesale broker,” Ben Johnson, senior vice president, wholesale executive, Liberty Mutual Insurance, said. “We also see the market conditions driving more activity toward the wholesale broker. We see the impact of private equity acquiring retail agents, frankly, driving more business into the wholesale brokerage market. As a result, we are extremely excited about our wholesale partnerships, surplus lines business, and where things are headed.”
“It's hard to be an expert in everything—as agents are sometimes thought of by their clients, which Mr. Ryan and others have made apparent and dealt with through specialization in practice groups,” Stegall said. “Agents need to know where the expertise lies and develop relationships with those people, be they wholesale brokers with particular expertise in a line of business, or MGAs that specialize in those risk spaces. I believe most successful agents and brokers are doing this now.”
“All the firms are looking to grow, and that's across the board,” Hagerty said. “A lot of these firms now are backed by private equity, and you can bet that they certainly want growth. Retailers are cognizant of how much business that they send into the wholesale channel. So it's understandable why they might want to delve into that segment. We've already seen more recent examples like SPG and One80 Intermediaries. Their parent ownership is historically retail, but they're expanding in the wholesale channel. I would expect that trend to continue.”
The customer, the ultimate insured policyholder, … expects an extremely high level of competency and focus from their wholesale brokers. That’s exactly where success has been driven.
Liberty Mutual Insurance
Strategic use of data is the lifeblood of wholesale success, AmWINS Group Executive Chairman Steve DeCarlo said in the series' initial episode. “When we see opportunities that can be improved through data analytics or just process, those are opportunities we want to invest in.”
“This industry is much more data-driven than it used to be,” Johnson said. “It's much more focused in subject matter expertise. The customer, the ultimate insured policyholder, when they think through how things are brokered and how product is distributed, expects an extremely high level of competency and focus from their wholesale brokers. That's exactly where success has been driven. When you think through how you navigate through a treacherous insurance market, both claims- and pricing-wise, the expertise and specialization is fundamental to being able to move through that.
“One of the things the wholesale industry has done is take a page out of some of the largest retailers in terms of managing, aggregating, repackaging and selling their data. Frankly, from where I sit, some of those tools have been fantastic,” Johnson said. “In particular, as a carrier trying to sell and be profitable in specialty, what better place to get data than the wholesale market, and, in particular, the more esoteric the lines you get, not just the professional lines.”
The Tech Factor
“What we typically find is that operations that specialize in a product or industry generally have good technology platforms that complement their specialty focus,” Hagerty said. “And their technology helps them assess risks better and do it more efficiently. So, their carrier partners benefit from the better risk selection while the wholesaler benefits from greater operating efficiency, which translates into more profit.”
There’s a segment of the sector that, unfortunately, is becoming a bit marginalized because of lack of scale, lack of specialization, and lack of technology capabilities.
Philo Smith & Co.
“Technology indeed is a great blessing but can sometimes be a curse on the agent or broker's perspective. It's the thing that keeps them up at night. The reason why is cyberrisk. We've been talking and hearing about this for so long, but it's very confusing,” Stegall said. “There's no standardization of forms. Practically every business has some special need. New risks constantly appear on the horizon. Realizing the number of silent-cyber provisions in property policies that have not been fully considered, the NotPetya cyberattacks have brought silent-cyber exposures to the fore, to a new pinnacle over the last two or three years.”
Wholesaling may have strong prospects overall, but not all competitors face equal prospects, Hagerty noted.
“There's a segment of the sector that, unfortunately, is becoming a bit marginalized because of their lack of scale, lack of specialization, and lack of technology capabilities,” Hagerty said. “And, it's reflected in their financial performance. There was a time when a smaller, generalist wholesaler could do pretty well. Now, their longer-term viability is being called into question more and more.”