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Business Resilience

Rise of the challenger broker – Part 2

Is this the right time to be launching a start-up or pursuing expansion? Insider Engage explores the benefits of the owner-worker model, the industry-wide war for talent and the drive to fill the power vacuum created by the mega-mergers

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Diversification versus specialisation: Key takeaways

• Bigger, more diversified firms can deliver economies of scale that will benefit clients in terms of cost and breadth of choice

• Rapid scaling-up and diversification can come at the cost of customer service, as firms prioritise shareholder/investor satisfaction

• Scale also brings the associated downside of added cost, which firms may seek to mitigate by ‘industrialising’ their processes, at the cost of ‘hands-on’ client service

• Siloed legacy business units can turn into warring factions if cultural differences are not reconciled

• Rapid consolidation has reduced the options available to clients, but also appears to have initiated a renaissance of boutique start-ups

• Anecdotal evidence suggests there is an appetite for a more hands-on, narrowly-focused alternatives to the big brokers

• Acquiring talent doesn’t guarantee a flow of new business but the relationships they bring are key to building revenue

In the first part of this article, Inside Engage looked at the emergence of the mega-brokers, the growth of the second-tier challenger firms and the emergence of boutique specialists.

Read on for details of the benefits of the owner-worker model, the war for talent and weighing up the ‘diversification versus specialisation’ argument.

The owner-worker brand

Less than five months after McGill and Partners burst onto the broking scene, there came the news of another, very different, start-up broker in the London market.

Lloyd’s broking stalwart Gordon Newman teamed up with his former colleague at Bishopsgate International, Neil Pearce, to launch Newman Pearce & Partners (NPP).

Newman is the eponymous co-founder of independent broker Newman Martin & Buchan (NMB), which was later sold to Cooper Gay (now Ed Group) in 2013 for around £40mn ($49.7mn).

After a stint as CEO of the combined entity’s Lloyd’s businesses, he moved on to Bishopsgate Insurance Brokers in 2016 as executive chairman, and then became head of Ardonagh Group’s specialty division when it acquired Bishopsgate.

After retiring from Ardonagh in 2018, Newman got to work on creating NPP, becoming chairman of the new entity.

He says, having looked at what was available in the market, the driver behind launching another specialist broker was “because we thought there was an opportunity for an owner-worker business type of deal”.

“It’s always been my contention that when the focus of the shareholders and the staff are as one, then you probably get the best out of the business when you align those interests,” he says.

“If people understand what the process is and everybody’s focused entirely on the client, rather than internal politics, then you have a fair chance of making a fist of it.”

At McGill and Partners, partner and head of specialty broking Karl Hennessy stresses that it is a “practitioner-led business”. “We have a universal approach to equity, so everyone has an interest in the business, and we have a unique operating structure - we’re a single P&L, we’re one team.”

“We’re trying to create an environment where people are naturally very engaged,” he continues. “There’s plenty of evidence that if you have a highly engaged workforce you will actually benefit from superior results.”

Moving into the major league

Meanwhile, in the vacuum created by the two mega-mergers, there is space for another highly-diversified global broker to dominate, and US-owned AJ Gallagher is determined to take that role.

The firm boasts UK and US insurance broking arms, London and US-based MGAs, reinsurance and specialty broking divisions, a Bermuda-based captive management and ILS operation, as well as claims handling capabilities and other broking operations.

The company’s UK broking and underwriting businesses, branded as Gallagher and led by CEO Simon Matson, comprise four pillars. The largest is retail, followed by London market specialty business Alesco, the broker’s managing general agency Pen Underwriting, and reinsurance broker Gallagher Re – formerly Capsicum Re, before it was re-branded in October last year.

“It is quite a diversified portfolio and there are a lot of benefits from that,” says Matson. “I liken it to those big mixing boards in music studios - we can dial up and dial down [services] accordingly.”

“For me the ambition is to build out in terms of scale and offering, so we’re closing the gap with the mega-brokers,” he says. “There is an increasing desire from customers to have alternatives and it’s my ambition to be the alternative.

Matson says the broker is now “fundamentally in every product line”, adding that Gallagher’s approach is “a question of depth of capabilities”.

Diversification versus specialisation

Given that every broker you speak to talks about putting the client first and offering a frictionless process, you have to query which model is the most successful in delivering these objectives. The smaller operators argue that they have the edge in this respect

“We’re much more interested in doing a few things really well than being everything to everybody,” argues NPP’s Newman.

“What we’re selling is a high level of cover and personal expertise. I like to think of it as the way (investment bank) Cazenove was in the 1980s. You’ve got to create a quality outfit that is known for that and you can price your products accordingly.”

For McGill and Partners, as its eponymous founder Steve McGill told attendees of the Insurance Insider (Re)Connect event in September, the opportunity “to go deep and narrow around specialist broking expertise” was evident before either of the above mega-mergers had been announced.

Hennessy picks up McGill’s theme with another analogy from the investment banking world: “You see the universal banks like Goldman Sachs and Morgan Chase which are akin to the larger brokers like Marsh and Aon, with a very broad product offering and comprehensive resources. But you have also seen, particularly since the credit crisis, the emergence of more focused, boutique investment banks where there’s much more of a client focus, more of a partnership ethos.

“We see ourselves in that niche – a sort of global super-boutique. And I would expect there will be other firms that follow in this space, because you are inevitably going to get fallout as a consequence of these huge mergers.”

The war for talent

Whether you’re overseeing a highly-diversified broking empire or a boutique specialist operation, having the right people in place is key.

The flow of broking talent around the market in recent years has been unprecedented in scale, and other firms have sought to capitalise on this period of flux.

“Marsh-JLT was a once in a lifetime opportunity - and then this [Aon-Willis] happens,” says Matson. “Some of that talent wants to be with [a firm] that can provide global capabilities, because their customers want to be with a global player. We want and we encourage entrepreneurial talent, and we give them a great deal of latitude and flexibility to flourish.”

Sometimes expansion is not about acquiring an entire company, but picking off those segments that best complement your existing offering.

Gallagher has certainly benefited from the MMC-JLT merger in this respect, having acquired the JLT Global Aerospace unit as it was spun off from the group.

“That’s been a fantastic success – really world-class talent,” says Matson. “We had a presence in that space but this just super-charged it.”

At McGill and Partners, Hennessy demurs when it is suggested that the firm has eschewed the model of building scale through acquisitions.

“We do have an acquisition strategy, but it is a talent acquisition strategy,” he says. “In the last 12 months, the firm has built up to 250 people - and probably by the end of the year will be close to 300 people. I would suggest that’s probably been the most aggressive talent acquisition play in this market ever - we’ve taken talent from about 56 different firms.”

However, people are expensive and, depending on the business model of the firm, a surplus of available talent in the market doesn’t mean that everyone is fishing for it.

“There are a number of people who would like to move, but most of them would like to move in a risk-free way,” says Newman. “All of our funding has come from the people in the company and there are not that many people who would back themselves to be able to produce business that makes money, so [recruitment] hasn’t got easier.”

“The type of people that we are interested in employing are necessarily the type of people who are good at what we do, because we don’t pay fancy salaries – the idea is that you get a share of the profits.”

Opportunity costs

However, you can’t build a business on talent alone. One reason there have been so many bitter court wrangles in recent years over the departure of broking teams is the perception that, rightly or wrongly, where key individuals have gone, key accounts will follow.

But at a time like this, when business travel is virtually at a standstill, generating new prospects for a young business can be a tough proposition.

“We heavily rely on travelling to find out what [client’s] issues are, and when you travel you nearly always come back with bits of business - so we haven’t grown as fast as we expected to because of that,” admits Newman.

A further consequence of not being able to effectively ‘buy in’ new business via an acquisition is that in times of economic stress clients are likely to stick fast, than venture into the unknown.

As Newman notes: “A lot of people are probably sitting there until the end of the year, thinking they can fill their current capacities by seeing renewal business, rather than dipping their toe into new stuff. So both those things have held us back.”

That said, acquiring scale and reach has its own challenges. One element of the MMC-JLT merger worth noting is the degree to which areas of combined business were duplicative rather than complementary. JLT Re and JLT Specialty, for example, were soon folded into Guy Carpenter and Marsh, respectively, with senior executives departing for other brokers. That duplication of talent and capabilities will have added cost to the merged entity that, in the short term, may not have been fully offset by increased revenues.

For the smaller broking operation, absorbing this kind of cost burden is not an option.

“You have to think there is a genuine opportunity there and you really need to know what you’re getting into,” says Newman. “When you’re small and it’s your money, it tends to make you a lot more careful about the type of things you do - you can’t be cavalier in the type of teams you take on.”

For Matson, the decision to expand into new areas of expertise similar requires a solid foundation.

“It was a very conscious [decision] for us to invest in reinsurance, for example. We had a proof of concept with Capsicum Re, and clearly that set of customers want more choice.

“We are [also] in the benefits space - and all of those things hang together nicely, as long as you are doing it for the customer rather than it purely being a revenue play. It’s a short-termism to force an outcome.”

Part 3 of this series on the respective benefits of the diversified and specialist broker models will follow next month, as Insider Engage looks at the strategy of the former ‘Big Three’ brokers and the future landscape of the two mega-brokers

To read the first part of this feature, click here

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