Easing the Squeeze

It is no secret that times have become tough for the smaller, independent brokerages in Canada. The recent hard market has added to that pressure, as “mom and pop” operations get caught in the squeeze for large numbers. Despite excellent client relationships, a solid image in the local community and (often) good loss ratios, these brokers face the classic “catch-22”. Insurers say they want to do business with them, but require a certain minimum volume commitment. If they could get bigger, they could retain some of these markets. But to get bigger, the smaller broker needs the capital to invest in technology, staff and infrastructure.

The squeeze has been on for several years, evidenced by the declining number of brokerage firms across the country. In Ontario alone, the number of brokerages has declined from more than 2,500 in the late 1980s to 1,800 by 1998, and to just over 1,300 today, according to Registered Insurance Brokers of Ontario (RIBO). Figures elsewhere confirm this declining trend, with brokerages having shrunk in key provinces, for instance there are now only 790 firms in Alberta and about 1,100 in Quebec.

PAST OPTIONS

Some market experts, like consultant Laird Laundy, hold dire predictions for the small broker. He estimates that the mom and pop operation of brokers will shrink even more over the next 10-15 years, with the once-stable pillar dwindling to just 10% of the total broker distribution channel by 2015.

So what alternatives do small brokers have in the current market? One option open several years ago has pretty much faded: the acquisition wave of the public consolidators. The well-publicized demise of the publicly traded entities – Equisure, Canada BrokerLink, to name a few – put a damper on the buying frenzy of the 1990s. Although there is some activity in private acquisitions, these generally tend to be the larger regional brokers, often with $10 million plus in premium volume.

Another option for the “little guy” was “clustering”. This was also a trend witnessed in the 1990s, as groups of like-minded brokers formed quasi-marketing outfits to find strength in numbers. With the independent nature of brokers and the lack of structure to many clusters, the results so far have been mixed. Even structured groups and formal mergers have not led to true economies of scale.

Another alternative for the mom and pop operation is to either accept significant controlling interest from an insurance company in the brokerage or form tied “agent” relationships with a single carrier. Some insurers have been active in buying majority shareholder positions in brokerages – an experiment that shows little sign of progress. Insurance companies generally have realized the challenges of being both manufacturers and distributors of the same product.

In all of these cases, the brokerage principal was required to sell the business, give up day-to-day control of operations or relinquish independence. Often the choice was simple: give up your identity or go out of business.

NEW BREED

Are there any alternatives in the current marketplace? This is an especially relevant question as principals look at perpetuation and succession planning. An enterprise originating in the U.S. believes it may have the answer.

Strategic Independent Agents Alliance (SIAA) was started in 1983 to breathe new life into the broker distribution channel and capitalize on an inherent synergy between smaller firms and larger regional players. Since then, it has grown into the largest independent broker in the U.S., with a presence in 48 states (and now Canada), with about $2.4 billion in premium volume and a network of 1,075 brokerages (or agencies).

How has SIAA worked down south? The company has divided the U.S. into 135 “territories”, with each having a “master agency”, typically a large broker with well over $1 million in revenue. This master agency builds its network of local smaller brokers within the territory. Its benefit to the supporting brokers lies in access to markets, underwriting services and technical resources. In return, the master agency gets a percentage of commissions through a structured profit-sharing agreement. SIAA is careful not to call itself a franchisor or cluster – it is instead a “national distribution network.”

SIAA recently expanded into Canada with Steve Palmer, president of Nova Scotia-based The Safety Group, at its northern helm. Palmer says he was struck by the uniqueness of the concept and the potential of applying it to the Canadian market. After meeting with the senior management of SIAA, he bought a licensing agreement and the rights in Canada. “Independent brokers here face many of the exact same problems [as in the U.S.]. The big issue for us is how to help the small guys build value in their organizations.”

Palmer says Canada is similarly structured into 19 different territories – two in the Maritimes, four in Quebec, seven in Ontario, one in Manitoba, one in Saskatchewan, two in Alberta and two in British Columbia. The Safety Group became the “master broker” for the two Maritime territories, and has already built a network of 12 smaller firms throughout the region. Of course, the larger brokers benefit as well. Palmer would not disclose the specific commission percentage split or associated fees for smaller brokers joining the network. But, he stresses that SIAA Canada is not a “broker consolidator”.

“We are a true alternative for the broker who wants to remain independent and does not want to sell, merge or cluster,” Palmer comments. “We are a cohesive network tied together by co-operative interests and strict guidelines.”

SIAA Canada’s regional president, Ken Rayner, says the response to the concept so far has been positive, but the firm has yet to officially sign-up other master brokers. It is in the process of finalizing negotiations with three large Ontario brokerages, and is also in discussions with firms in most other provinces. “We expect that once Ontario brokers are on board, this will spark interest across Canada”.

SETTING THE STAGE

The buzz from brokers may be the least concern for the start-up firm. The most severe hard market in memory represents a key challenge for SIAA Canada, particularly in the volatile personal lines business. Palmer and Rayner acknowledge that many insurance companies are in the midst of struggling with paper-thin margins and show a distinct lack of appetite for growth in personal lines – often the “bread and butter” of smaller brokers. Rayner adds that SIAA Canada has met with six insurance companies and heard the same message: “they’re trying to put 2002 behind them”. But, he adds, “insurers realize the hard market is not going to last forever, with many already talking about initiatives for growth over the next two years.” And, Palmer observes, when companies do begin to pursue growth strategies, SIAA Canada will be well positioned as a national distribution network. In fact, he expects SIAA Canada to achieve more than $1 billion in premium within the next five years, as well as gain a 4% stake of the total broker distribution channel.