Broker Succession Planning: Building the Future

The insurance brokerage profession worldwide faced its biggest challenge in the late 1990s with the introduction of direct electronic selling of property and casualty insurance. This period also saw resurgence of the “financial services supermarket” concept of integrated product selling, with regulators adopting stringent licensing requirements on financial intermediaries to enhance consumer protection. Yet, despite these sudden hurdles on the business track, independent insurance brokers held a firm grip on their markets — with Canada’s brokerage community maintaining ardent support from insurers. Is the future set? Hardly, warn market commentators, factors such as an aging demographic in the broker population combined with different lifestyle expectations of younger generations is threatening the future growth and survival of brokerage firms. Succession and long-term strategic planning are becoming top priorities in a new era of financial services distribution, they warn.

Having recently won momentous victories in the battle against direct sellers and the threat of a bank invasion into their business, Canada’s independent brokerage community appears to have gained a firm grip on the future distribution of insurance. However, not all is well in the kingdom, observe the insurance professionals consulted in this article.

The biggest threat to the independent brokerage movement lies in lack of long-term planning for the future. Where in the past most brokerage firms were small “mom and pop” operations which were passed from one generation in the family to the next, changing social expectations and increased cost-pressures within the insurance industry are resulting in fewer businesses remaining independent. The lack of “new blood” coming into the broker market has been identified by the provincial brokerage associations as a significant problem — with many of them having created student and “young broker” training courses in a bid to revitalize interest in the insurance business.

While some factors influencing the decline in new broker entrants are beyond the profession’s ability to influence (namely changing social interests and expectations), an area which can be influenced by broker principals in their firms is succession and long-range planning. And, the commentators warn, whether a brokerage has a strategic plan for the future is increasingly becoming an issue under scrutiny by insurers in choosing their broker partners.

Family ties

From a statistical perspective, less than 50% of small businesses survive being passed from one generation to the next, observes Steve Frye, a partner of broker management consultants Cookson, Walker Consultants. “We are definitely seeing more situations where non-family members are buying out the brokerage. Many brokers have indicated their disappointment that their children have not been interested in taking over the business.” This, combined with the fact that the current demographic structure of the brokerage market consists of an exceptionally high portion of so-called “baby boomers” looking to retire in the not-distant-future, is creating a disparity in the “outgoing” versus “incoming” number of brokers.

“Succession planning really became a big issue about three years ago because of the aging population. There is a large number of brokers in this age group [baby boomers] who do not have any family successors,” Frye notes. Like most small businesses, he adds, the principal(s) of a small brokerage rely on their investment in the firm for retirement purposes. The appearance of the broker network consolidators arose to fill this need, however, the significantly higher values of purchases made has exasperated the problem of retaining the business within the family. Basically, few of the younger employees within a brokerage, be they family members or not, can afford to the pay the prices that have been set by the consolidators, Frye says.

This trend has been noticed by Dave Kuyper, director of distribution development at Zurich Canada. In situations where the company has assisted in brokerage buyouts, he says there are fewer family successions occurring. “This is partially due to the premium values that have been attached to brokerages, which has pushed the price way beyond the reach of family members. When you’re getting two and a half times annual commission waved in your face as a purchase price [by a consolidator], then what are you going to do?”

Another factor which has discouraged new entrants to the broker market is the stringent licensing requirements and ongoing education requirements, comments Frye. As a result, broker principals are having a difficult time finding new young talent to bring into their firms, he adds. “Many brokers admit that they got into the business [of selling insurance] without a clear objective. In the market of 20 to even 10 years ago, it was not difficult to become a broker. Today, the licensing requirements have become very tight.”

Planning ahead

Succession planning is likely to remain an issue at the fore as the market moves ahead, Frye predicts. A number of insurers have woken up to the fact that entrusting their business with the current principal of a brokerage could leave them facing a whole new situation in a few short years. As such, Frye comments, insurance companies are beginning to ask to see a succession plan before awarding contracts.

And, Frye notes, several broker-supporting insurers have stepped forward in assisting brokers in financing and business strategic planning. “There’s a real commitment by insurers in Canada to support brokers.” Therefore, he adds, there is little reason why a brokerage should not have a long-range growth plan.

“It’s never too soon to begin succession planning,” confirms Jim Ball, chairman of the Insurance Brokers Association of Canada (IBAC). While IBAC has guidelines for succession planning to assist members, this really falls under the ambit of the provincial associations. However, in terms of his own B.C.-based brokerage, Ball began implementing a succession plan several years ago. “I’m 59 years of age, although a lot of brokers got out when the consolidators came into the market, I really didn’t want to sell, but I’m a sole owner.”

Ball was fortunate in having a son interested in the business and with the assistance of several insurers in training and providing financing options (see further case study details below under company/broker partnerships), he was able to gradually reduce his day-to-day executive responsibility. “It was very comforting to me to know that we had a plan in place which enabled me to focus on the long-term growth of the firm.”

Having a succession plan in place offers another benefit, Ball points out, in that employees of the firm are comforted by knowing that the business will not be sold out from under them. This creates stability and enhances efficiency, he observes.

And, although some insurers are showing an interest in the long-term planning of brokerages, Ball believes this interest is still relatively low considering the critical nature of relationships to the business. “Insurers are not coming around and asking for a long-range business plan unless you are asking to borrow money from them. I think this is a mistake considering the exposure they face by not knowing the future of their broker partners.”

Gil Constantini, a vice president of IBAC, is another strong supporter for advanced planning. “A lot of brokers have not created a strategic plan to deal with the future — in today’s market you can’t get by like that anymore.” Constantini is a senior partner of an Ontario-based brokerage group which has primarily grown through either acquiring or entering into shared commission agreements with smaller broker firms. Not all brokers have heirs to take over the business, he observes, which creates a concern for the future. An option to long-term planning is to combine interests with a larger group. “Basically, there is a guarantee that there will be someone there to buy the business at a fair value when the time comes.”

Volume expectati ons

A significant factor influencing the current consolidation trend in the broker community is the business volume expectations of insurers as well as the drive for cost-efficiencies, says Renate Mueller, president of the Insurance Brokers Association of British Columbia (IBABC). Mueller recently sold her solely-owned brokerage to a larger group operating in B.C.

Selling was not an immediate issue, she explains, but an offer was made that was too good to pass up. Mueller bought the brokerage from her parents in 1984, but without any children of her own, a decision had to be made. “I believe that this was the right choice, the markets are shrinking and the volume requirements of insurers increasing. By combining [with the brokerage group], we’ve gained a competitive edge which will enable us to grow our book of business. Basically, I now have the ability to sell without dealing with the backroom administration.”

Although Mueller does not regard the mergers and acquisitions occurring among brokers to be a threat to the profession’s independence, she agrees that owner-managed operations are more agile in responding to market shifts. “When you’re owner-managed you tend to be a better business, some broker clusters have broken down because of this.” As such, she says brokers developing a long-range strategy need to consider both the market realities and their own objectives before selling. On the one hand, the market is getting tougher to survive in as an independent, however, not all individual brokers will feel comfortable operating as part of a larger group.

Company/broker partnerships

“In today’s market, everyone seems to be picking partners, and we’re definitely seeing more partnerships between brokers and insurers,” comments Ball. While there has been a long established practice of insurance companies assisting brokers with financing for acquisitional growth and succession, recent years have seen an increasing number of equity stakeholding positions being taken by insurers in brokerages.

Although some brokers are unhappy with this latest trend, on grounds that insurer influence in brokerages will undermine the profession’s independence, Ball says these arrangements have to be seen in perspective. Insurers have and continue to play a pivotal role in assisting brokers with their long-term objectives, and as long as the relationship remains “hands off” in the day-to-day management of the brokerage, then “independence” is not an issue, he contends.

Ball is particularly supportive of the financial and skill training programs offered by some insurers. Referring to the circumstances of his own firm, Ball explains, “Chris [the son] did some work at the office one summer and expressed an interest in the business. Once we had sorted out what direction he wanted to go, and established the necessary skills, I arranged for him to receive hands-on training through The Dominion of Canada Insurance Co.” Ball’s son is now back at the brokerage where he and a fellow employee with the firm have entered into an arrangement to buy out his father’s equity holding through financing from Zurich Canada. “This is a win-win situation for the insurer(s) because they are building relationships with the future principals in the brokerage,” Ball notes.

Another success story lies in Ontario-based commercial brokerage group Hunter Keilty Muntz & Beatty. The brokerage’s chairman Bruce Keilty is a firm believer in the role played by insurers in ensuring the future of the brokerage movement. “You want your shares to go to the right person and get the right price.”

Through financial assistance from one of the major insurers, arrangements were made for Keilty’s son to acquire an interest in the firm. This followed two years of training at Lloyd’s of London in their U.K. offices. “The training programs of the insurers are great, they enable newcomers to develop the skills and gain grounding in the basics of the business.” In that respect, Keilty notes that many insurers request to place members of their own staff with a brokerage to gain knowledge and understanding of the upfront end of the business. “It’s a give and take situation which works for all.”

Insurer initiatives

Several insurers have established, or are in the process of establishing, indepth broker support programs toward long-term planning. Zurich Canada is currently developing several programs, according to Kuyper, one of which includes financing assistance through the Bank of Montreal (BMO).

However, Zurich’s main program involves a series of management seminars conducted through independent consultants on long-range business planning. “We tend to find that many brokers leave their planning to the last minute which limits the options available. We’re trying to encourage participants to act early and think for the long-term.”

An area which is becoming an increasing problem is finding new talent to bring into the brokerages, Kuyper says. As such, Zurich is currently looking at how it can assist in sourcing new entrants to the business, he adds.

ING Halifax is set to launch its “mPower” broker support program in coming months. So far it has been operated on a pilot project basis with between eight to 10 brokers on the program, says the company’s director of marketing and distribution, John McArel. It involves what McArel describes as “a total emergence” experience whereby an entire brokerage’s staff goes through a 12 month business program, “…instead of a ‘hit and run’ approach”. The insurer also operates a sales training school on integrated product selling, he adds. “It’s all about developing deeper, integrated partnerships,” McArel observes.

In addition to training support, ING Halifax offers financing and equity arrangements to what it regards as its “concentrated brokers”, in other words, those placing a significant volume of business through the insurer’s books. However, McArel emphasizes, “we don’t provide financing without a solid financial reason to do so”.

The Dominion of Canada Insurance Co. is also seen by brokers to be highly supportive to the movement. Although the insurer does not run a formal broker training course at this stage, explains vice president of business development, Alan Hanks, it does work closely with its broker partners. Dominion has assisted brokers with financing in growing their businesses, he adds, as few banks are willing to take on the lending risks of a business they do not understand. Dominion does not take equity positions in brokerages with the belief that the market succeeds because of its independence, Hanks remarks.

In terms of the future, Hanks is confident the independent brokerage, including “mom and pop” operations, will continue to be a viable distribution channel in the new financial services era. “I think the ‘mom and pop’ style brokerage will survive, it really comes down to location — in small communities they will thrive, and there is less of a concern with regard to succession planning. Larger city brokerages face a bigger challenge with regard to succession planning, due to their size and value of the business.”