Returning to Relationship-based Advice

For BFL Canada president Jack Lee, becoming president of the Toronto Insurance Conference (TIC) is an instance of dj vu. He already held the position 20 years ago, when Brian Mulroney was Prime Minister and Bon Jovi’s ‘Blaze of Glory’ was firing up the charts. “I’m a retread with a number of years in between,” quips the native Montrealer.

Roughly 40 years ago, as he was preparing to graduate from high school, Lee sought advice from a guidance councillor. He learned that a large commercial insurance brokerage was preparing to set up an office in Montreal and was advertising for people to work at the new location. Lee’s guidance councillor put him in touch with the brokerage’s recruiter; Lee subsequently became one of two people chosen to help launch the company’s Montreal operations.

Lee has always worked in commercial lines. Initially, he worked in a department that placed U.S. business with the London market through the brokerage’s Montreal facilities. “The best thing about that experience was that it taught me early on that whether the premium was $1 million or $10,000, the only difference was a few zeros,” he says. “I was never intimidated by higher-end premiums. It was always the same philosophy when handling accounts — big or small, you treat them all the same.”

A lot has happened in the 40 years since Lee got his start in the insurance market. Reflecting on his experience, he notes perhaps one of the largest shifts has been the role of the underwriter. “Earlier on, at least in the first 20 years [of my career], the underwriter was key to the relationship between the insurance company and the broker,” he says. “The underwriter had a lot of authority. But over the past 10 or 15 years, they have become tightly regulated. They have to follow their guidelines and just about everything they do has to be referred back to head office or someone senior. And unfortunately the underwriter rarely has any input into grey area claims.”

This shift has created challenges and fundamentally altered how business is conducted. In earlier days, brokers would rely on the underwriters with whom they had fostered a good relationship, knowing that the underwriter would back them up in the event of a complicated claim and work with the broker to place difficult risks. But as time has passed, Lee says, the emphasis is no longer on working relationships and trust. Rather, the emphasis on whether or not a risk fits within the pre-set parameters within which an insurer is comfortable underwriting.

“We reminisce about the days when coverage would be bound on the back of a napkin,” Lee says. “That would be ground for being fired today. You can certainly see from that standpoint why some insurance companies have blocked that [way of doing business]. But if you go back to the founding of insurance, the relationships between the broker and underwriter is what it was all about — and that’s not as significant anymore. If the account fits, then the insurer underwrites it.”

The challenge to this cookie-cutter way of doing business is in trying to place complicated risks. “The easy placements, everyone can do,” Lee says. “The real challenge for any brokerage firm is the account that has just come out of a major loss, is just starting up or — as are a lot of companies today, because of the economy — the company is running close to the red line. These are the clients that need the most help. As a broker, you have to find the market that’s willing to consider them even though they’ve been told to stay away from those accounts.”

Shifts in the Canadian marketplace are adding a new wrinkle to the broker’s task. Commercial insurers have entered the Canadian market, increasing competition for premium in a market that shows no real signs of growth. For a broker, the crowding of the marketplace creates a few new challenges. Trying to satisfy the needs of the underwriters while honouring existing relationships is already a tricky balance. But now the talent pool is a finite resource, Lee observes. Many of the new entrants are poaching staff from already existing companies. “So, the relationship you’ve had with those underwriters, now they’ve gone over to a new company,” Lee says. “There’s a need to support them as well as the underwriter that’s taking over from the incumbents.”

The increased demand for experienced, seasoned underwriting staff may be outstripping available resources. An increasing number of front-line underwriters are referring a risk not just to head office in Canada, but down to the United States or London to get a proper answer. This is because they simply lack the experience to handle the risk on their own, Lee says. “It’s an issue of the talent pool,” he says. “There’s just not enough time for all of these companies to be beefed up with good underwriters — and they [the underwriters] tend to move around a lot.”

Markets are becoming as fluid as the people. Lee notes a flurry of merger and acquisition activity may be on the horizon, pointing to RSA’s recent acquisition of GCAN.

Nevertheless, despite all of these observed shifts in the marketplace, Lee says his relationship with the TIC has remained fairly constant over the past 20 years. Earlier this year, he seized the opportunity to rejoin TIC’s executive committee as its vice president, which serves as the next year’s president. He had just wrapped up serving on the board of Ontario’s broker regulator, the Registered Insurance Brokers of Ontario (RIBO), and wanted to continue supporting the industry through active involvement with an association.

One big issue the TIC continues to look at will be ensuring brokers and their clients are fully aware of and in compliance with the Excise Tax Act.

Clients of commercial insurance brokers must pay an excise tax when purchasing insurance through foreign, unlicensed markets. Canada Revenue Agency (CRA) allows an exemption from paying the tax if clients can prove that not enough capacity existed in the licensed Canadian market to insure their risk. To qualify for the exemption, CRA requires clients to provide five letters of declaration from insurance companies, recording their refusal to provide coverage. The letters must be dated prior to the inception of the policy.

“If the client is audited and the paperwork isn’t what it should be, they are subject to a 10% penalty tax and CRA can retro-tax up to four years on what the true premium should be,” Lee says. “The Excise Act has always been there, but as we understand it, the government is going to be looking at more enforcement and checking of clients to ensure they’re in accord.”

Needless to say, says Lee, “the brokers who do a lot of that business, which are larger commercial brokers, need to ensure that they and their clients are in compliance and that their clients know what the compliance issues are.”

Perhaps now, more than ever, being an insurance broker has never been more complicated. But, ultimately Lee remains buoyant about the business. “It’s a great business to be in,” he says. “It’s refreshing to look around conventions like the Insurance Broker Association of Ontario (IBAO)’s and to see so many university graduates who have chosen this field and want to get into insurance. It’s a wonderful thing.”

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We reminisce about the days when coverage would be bound on the back of a napkin. That would be ground for being fired today.

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If you go back to the founding of insurance, the relationships between the broker and the underwriter was what it was all about.