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Inside in Full: WTW North America: Business-school smart vs real-world smart

Analyzing the operations of a large US retail broker, it is easy to see how you would look at fragmented carrier/wholesale broking relationships and conclude something has to change...

Trading with hundreds of organizations is messy and expensive. The larger a production relationship with an individual partner, the more leverage you have. And therefore, a strategic carrier and wholesale broker strategy offers the potential to deliver growth through improved economics, whilst potentially reducing the brokers needed to transact business.

Consolidation of trading parties is on-paper, business-school smart. It makes a good slide deck.

WTW’s North American broking arm – under the leadership of former Chubb/Sompo executive Michael Chang since October last year – is working on rolling out this playbook.

It has been holding negotiations with insurers around strategic carrier relationships that are said to include enhanced commission arrangements for some time now.

And it is also preparing an aggressive consolidation exercise around its wholesale broking arrangements, with a view to dropping down to 1-2 preferred partners.

Sources across the carrier and wholesale broker spectrum have expressed unhappiness around both the substance and tone of the discussions, although some insurers have signed up to panels already.

Although the plan is business-school smart, in the actually existing world of US insurance broking it is flawed.

Some of the reasons the strategy is not real-world smart relate to the fundamentals of insurance broking, some reflect cyclical factors, and others relate to its own weak positioning as it seeks to bounce back from its abortive sale to Aon.

Fundamental challenges:

  • Corralling brokers to break longstanding trading relationships is really hard
  • Clients are the ultimate arbiters of where/how business is placed
  • Insurance is relationship driven, not transactional
  • Son of Spitzer is a real possibility, particularly given how widely the industry is disliked

Cyclical challenges:

  • Consolidation of carriers and wholesale brokers is a soft market play
  • The Long Firming, and the property micro-cycle mean retailers need to maximize capacity and placement capabilities

Company-specific challenges:

  • WTW US broking operations are a long-term underperformer on growth/margins
  • The company lacks social capital in the market to facilitate major changes
  • Restructuring and pushing through trading partner consolidation creates risk and distraction from hiring and culture change
  • Let’s take each of those three sets of challenges in turn and look at them in more depth.

1. Fundamental challenges

The first and biggest challenge around the consolidation of trading relationships is that brokers are not unitary monoliths.

They are networks of thousands of individual, independently minded staff. Outside of Marsh and Aon – and even to a degree in those organizations – staff tend to be sceptics about the idea that the business belongs to the overall enterprise.

Often staff will have worked on the same accounts and with the same individuals at other broking firms, in some cases servicing clients for decades. Similarly they will have transacted business with markets and wholesale brokers – again often with the individuals they have traded with moving between firms.

Corralling brokers to break longstanding and mutually fruitful trading relationships on the carrier side or in wholesale broking is really hard. Ask anyone who has tried.

Aon tried really hard on wholesale consolidation with its preferred Ryan Specialty relationship in the mid-to-early 2010s, and after a number of years admitted the reality of where its wholesale business was placed by re-adding Amwins formally to its panel. And sources suggest that it also still places substantial business via CRC.

This is an organization with sharp, driven leadership, quality analytics and a strong corporate culture that it works at ceaselessly. But individual brokers were still able to resist consolidation of placement.

In doing so, they were most likely supported by clients – which are the ultimate arbiter of where business is placed.

Strategic carrier relationships do not necessarily align with clients' preference for where/how their business is placed. And clients rarely like the advice that they should place business in the way that will maximize their broker’s remuneration.

Tied to these challenges is the relationship-driven nature of insurance broking. The social capital in the industry is very real.

Business is successfully transacted all the time because underwriters and brokers know that there will be another situation where they are the ones who need a favor to be done. Switching trading relationships squanders this social capital.

Those are challenges in making the reality of placement correspond to the board presentation about it.

But even if you are able to make it a reality, you leave yourself open to a regulatory backlash.

Insurance broking is a good business on almost every axis, but one of its few weaknesses is that it is subject to regulatory shock.

The insurance industry is unpopular (and probably becoming more so), making it the perfect target for watchdogs – particularly those with political ambitions.

It is very hard to say what the chances of it happening are, but Son of Spitzer is at least a plausible scenario.

Working hard on this kind of strategy leaves you open to such an attack, and requires flawless execution around strategic carrier discussions, client management and remuneration disclosure.

It is easy to see how one heavy-handed email or text from a mid-ranking broker exerting clear leverage could compromise the whole enterprise – even if in conception and design the whole thing is client-centric and compliant.

2. Cyclical challenge 

Consolidation of carrier panels, strategic carrier relationships and preferred wholesale panels are essentially soft market plays.

Getting them done relies on a balance of power between broker and trading counterparty that favors the retailer.

Right now, the US P&C pricing cycle is still in the grip of the Long Firming (even if it is unevenly waning), and the property micro-cycle is just picking up pace.

Insurers have power in this kind of market. Wholesale brokers – needed desperately to get cat property placements home – also have power.

Brokers (and ultimately clients) need access to all of the placement capabilities of the wholesale market, and breadth of capacity across the admitted and non-admitted market to get stressed deals home.

3. Company-specific challenges

WTW’s US broking operations have been the principal growth and margin problem of an organization that has long underperformed its Big Three peers.

Shielded from public view and analyst scrutiny by canny segmental reporting, WTW US Corporate Risk & Broking has been the weakest performing unit in the group, according to sources.

The upside offered by fixing it was a big part of Aon’s thesis in buying the business.

Crucially, it is not an organization with a significant market credit that it can draw on either with wholesale partners, or carrier partners.

As befits his reputation as a freewheeling disruptor, the WTW US CRB CEO Chang has come out of the gate at a million miles an hour.

He has already moved to restructure the organization around verticals (he has a background operating in a vertical model in real estate).

And now he is looking to rapidly recast carrier relationships and wholesale broking relationships.

That is a lot of early re-engineering, particularly for a first-time broking leader.

As described by successful practitioners, broking is a really simple game. Above all else, what WTW was perceived as needing to do post the Aon debacle was: a) put in place experienced, high-caliber broking leadership; b) rebuild the heavily denuded talent base further down the organization; and c) improve staff morale by making them feel they are valued and part of a winning team.

As suggested above, brokers are straightforward organizations. The ones that win are the firms that have the best talent, and which find a way to provide a supportive environment, with the tools and freedom to serve clients with a total focus. And ones that have hard-charging leadership in place to fire them up and lead from the front.

I don’t have the kind of internal visibility to know the degree to which this is also being done at WTW – Chang certainly has the drive and hustle.

But re-engineering the organization in these kinds of ways at minimum creates risk and distraction that WTW could do without while it seeks to rebuild its staff base.

 

Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.

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