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Top brokerages are redefining their business models to build and bolster a competitive edge.

Many are acting more as consultant than salesman.

This changing model is having an impact on revenue streams.

In a world where brokers face new kinds of competition and risks are emerging, expanding and evolving, what are the characteristics of a leader?

Brokers are now thinking in new ways about the services they provide and who within the firm can best deliver them. Wholesale change is not required, but top brokerages are redefining their business models to build and bolster a competitive edge. To gain leverage from their advantages, leading firms are slowly adapting the way they do business.

“With our clients facing more complex risks, we must be even more creative with our innovative solutions,” says Rob Cohen, chairman and CEO of the IMA Financial Group. For IMA, Cohen says, teamwork and an integrated approach are part of the answer. “Our subject-matter experts work closely with each other, our producers and our service teams to ensure we’re thinking of all the different aspects of our clients’ needs,” he says. “We have to watch everything, from natural disaster trends to our global political landscape, to just keep up with factors constantly affecting the way we work and live.”

Michael Victorson, president and CEO of M3 Insurance, says clients expect brokers to take a team approach when managing their complex risks. He cites Dr. Atul Gawande’s work on healthcare delivery, which stresses primary care physicians are no longer able to be and do everything for their patients by themselves.

“This same concept holds true with our producers and the work they do with their clients,” Victorson says. “In today’s market, the client requires and expects a coordinated team.”

A critical driver is the level of specialization and sophistication required to assist clients in transferring and managing risk effectively and efficiently. “No one person can be an expert in all areas, from cyber to claims, reinsurance, loss control, workers compensation, et cetera,” he says.

This shift to a multiskilled team approach has been responsive. “We have had consulting services in our company for many years, but not as our core approach,” says Dan Keough, chairman and CEO of Holmes Murphy. “This changed about five years ago when our clients needed us to better understand their challenges and search to find or build solutions for them. All we have to offer our customers is our cumulative knowledge to solve their problems and help them manage their cost. Our culture is key to our ability to work together as a team to serve our clients.”

The emphasis on culture is reflected in Holmes Murphy’s approach to helping its clients. The company explores clients’ corporate cultures to gauge how they affect their financial decisions. “We are also looking at ways to simplify complex issues like healthcare, to demonstrate the impact we can have on their business,” Keough says.

Taking the Long Road

Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.

Rob Cohen, chairman and CEO, IMA Financial Group

Wortham chairman Richard Blades says his company operates in a similar way, acting as more of a consultant to clients than simply as a salesman or a transactional brokerage. “It is important to execute the transaction exceptionally well,” Blades says. “However, you need to take the long-term approach with clients and offer them consulting on the appropriate program structure and to manuscript the coverage to fit their particular needs.”

In Blades’ view, a long-term perspective is critical when designing a risk-management program, since clients buy insurance over many years, not just once. He says brokers should approach the market and negotiate the best program structure, while ensuring that doors are left open for clients in case they want or need to make changes to their program or carriers.

Part of this can entail the development of mutually beneficial relationships between brokerages and carriers that ultimately provide a lower total cost of risk over an extended period of time, Blades says, since this comprehensive, future-oriented approach leads to high levels of client retention.

Victorson says his firm is now behaving like a consultant, even before his people get through the door. “If M3 approaches clients in a transactional way or with a transactional mindset, then that’s exactly how we will be viewed and treated,” he says. “We have made significant progress, collectively, in our consulting mindset and business plan execution orientation.” The types of questions and issues clients bring, he says, act as a litmus test to gauge M3’s progress in this area. “When our clients look to us for advice on critical business matters that may have little to do with insurance but have a significant impact on their business, we feel like we have achieved the level of advisor.”

This change in the nature of leading broking houses is having an impact on revenue streams. M3 has seen a significant growth in fee-based (over commission-based) remuneration. “Over the last five years, our fee-based revenue as a percentage of our total producer revenue has more than doubled,” Victorson says. He expects the trend to continue, both for M3 and across the brokerage industry. “Looking forward, we also believe there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.”

Diverse Talent Fuels Growth

The move from purely transactional broking to consulting means broking firms must become more complex. One clear reflection of this evolution is the expanding nature of the specialist position, from the front line to an enlarged C-suite. To deliver and manage consulting services requires new skills, which means hiring different types of people who have the appropriate expertise.

TrueNorth was formed in 2001 through the merger of three companies and targeted staged growth. Duane Smith, CEO and president, and his partners have built the company to $70 million from a revenue base of $9 million over the last 15 years.

“Early on, the six original founders realized we were good salespeople but not great at running the operations of our business,” Smith says. “One of the first decisions we made was to add a chief financial officer and a chief operating officer to focus on running the business so we could continue to focus on growing it.”

TrueNorth set six revenue-based thresholds as benchmarks for its growth and development. “What we didn’t realize is that, at each of the additional revenue levels, we would reach another ceiling of complexity that we would need to break through to continue to evolve and grow,” Smith says. “As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.”

Looking forward, we also believe that there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.

Michael Victorson, president and CEO, M3 Insurance

They added talent at each level: legal, loss control, HR, IT, training and development, financial analysis, software developers, project managers. “The list goes on,” Smith says. “Without these investments, we could tread water and manage expenses, but the ability to grow would taper off.”

Holmes Murphy also added talent as it evolved. “Diversifying our skill sets has fueled our company’s growth over the past several years. Hiring actuaries and attorneys has become our norm,” Keough says. Most recently, the company employed doctors to help clients understand how to get to the root cause of their healthcare issues and to drive down and manage their costs. “This has become our fastest-growing division,” he reports. “We’ve also brought on an individual who was successful in consumer engagement at a major airline, and we are bringing risk managers on board to better understand our clients’ needs.”

Cohen says IMA tries to stand out through its ability to attack problems and drive client results at “a much higher level.” People are at the core of that ability. IMA was one of the first insurance brokerages to hire a risk manager to help make clients’ working environment safer, he notes. “That tradition continues today by looking outside the traditional scope of insurance,” Cohen says. “We continue to hire people with advanced knowledge in their industries.”

The head of IMA’s energy practice is a former oil and gas company president. IMA has also looked outside insurance to make similar hires in areas including law, consulting, technology and construction. Hiring experts builds the company’s tradition of thinking beyond the customary definition of insurance, Cohen says. “They solve our clients’ complex problems, which also reduces risks that weigh on the performance of their companies.”

Data Are Only (an Important) Part of the Equation

The change has reached the very top, into IMA’s C-suite. The company recently created the entirely new position of chief data officer. “Data will have a huge impact on our industry and the way we do business,” Cohen says. “We’ve invested heavily in the ability to make internal, data-driven decisions. Under the leadership of our new chief data officer, we can run analytics reports in seconds that would previously take a week.” Cohen says the level of insight this analytical function delivers is unmatched by IMA’s peers.

Analytics are also an important tool at Wortham, where data specialists assess exposures and design the most appropriate insurance program for each client, based on the client’s unique risk profile. But Blades is wary of relying entirely on big data analysis. Traditional broking skills remain paramount. “The analytics are only a part of the equation in designing the program,” Blades says. “For instance, Wortham spends a considerable amount of time trending and developing assured’s losses and exposures to quantify the projected loss pick. This enables us to negotiate the appropriate collateral with a carrier and determine the optimal retention.”

Wortham reviews modeling results for catastrophe exposures while also consulting traditional engineering reports for estimated maximum and probable maximum loss figures.

“We use this analysis to assist in determining the assureds’ appropriate property and business interruption limits,” Blades says, “as well as any particular sub-limits for catastrophe coverage.”

Cohen says the ability to tame data has become essential. “Analytics are becoming required for businesses to succeed,” he says. “Customers expect the right product at the right time and at the best price. Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.” He believes the industry is facing a pivotal time and must “challenge the norm while remaining true to our tradition of excellence.”

As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.

Duane Smith, CEO and president, TrueNorth

Clients are expecting solutions that fall outside the traditional definition of insurance, he says. That demands brokers find solutions to their customers’ biggest pain points. “If not,” he says, “a dot-com, a search engine or a startup will. We have astute customers that expect us to be the beacons of innovation.”

Victorson believes the current wave of new approaches is more than a fad. “Innovation will continue to be a part of our industry, regardless of services that brokers provide or the delivery model and technology they use,” he says. To that end, M3 is closely following the evolving role of insurtech companies and evaluating how emerging technology might allow his brokerage to create a better client experience while making the firm more effective and indispensable to customers. But it will not be a bit of technical wizardry or a special approach alone that will deliver continued success. Another fundamental must underlie all that, as Victorson knows: “As always, the focal point of our evaluation will be our clients and acting in their best interest.”

Blades expects the evolution of the brokerage model to continue, especially in personal lines and for small commercial accounts. To survive, brokers must ensure they add value to their clients’ risk-management practices and insurance-purchasing processes.

“If we are not adding value, clients will start going more directly to carriers and/or buying coverage from an online platform,” Blades says, noting that they may very well return to a broker once they have experienced a claim that has not gone the way they would like.

“Our business model will continue to provide clients with value-added services and a consulting approach to achieving the optimal insurance program while reducing the overall total cost of risk,” he says.

Diversifying our skill sets has fueled our company’s growth over the past several years.

Dan Keough, chairman and CEO, Holmes Murphy

Amid the changes taking place in the ways brokerages do business, the best firms continue to focus on the traditional traits that make and sustain a leader: they are client-focused, striving to understand each client’s specific risk challenges and opportunities, and remain intent on adding value to their clients’ businesses.

That, they agree, will always be a winning formula.

Leonard is chief of the Foreign Desk.