“A difficult insurance market creates opportunities.” That's howJohn Hahn, co-founder of Wholesale Trading Co-Op Insurance ServicesLLC, begins to answer the question of why it makes sense to launchanother new wholesale brokerage during a soft market.

While that part of the answer is similar to answers given byindustry veterans Patrick Ryan and Glenn Hargrove, who launched newwholesale operations earlier this year, the rest of Mr. Hahn'sresponse explains why the ownership and delivery model for his firmis different from the rest.

(Mr. Ryan, Mr. Hargrove and their new firms were featured in theMay 24 print edition of NU. The article is availableonline at http://bit.ly/d1X8sI.)

“In today's environment, many wholesale brokers are strugglingto provide retailers with the service needed to best serve theirclients, while generating adequate revenue and profitability tomeet their long-term financial obligations. Consequently, the bestbrokers at many firms become more focused on chasing new businessthan providing client service,” Mr. Hahn said, adding that his firm“reverses that relationship. Our brokers will focus on clientservice for a limited number of retail broker members.”

Mr. Hahn, whose experience in the wholesale business includesbuilding Tri-City Brokerage and serving as president of BISYSCommercial Insurance Services (now part of Crump), co-foundedretail brokerage Edgewood Partners Insurance Center with anotherwholesale veteran, Dan Francis, back in 2007.

On Aug. 26 of this year, Mr. Hahn and Jeff Cappel, an industryinvestor, announced the formation of San Francisco-based WTC–aboutique firm that will be partially owned by roughly 30 of thelargest privately held U.S. retail insurance brokers that will makeup the bulk of the firm's client base.

In addition to EPIC and other retailers, the new wholesaler willalso be jointly owned by WTC executives, sponsors and selectfinancial partners, including Islington Holdings LP, an investmentfirm managed by Mr. Cappel.

Mr. Cappel said he has invested in both retail and wholesalebrokers over the past 15 years. Islington, he noted, has numerousinvestments in both public and private companies, including retailbrokers Beecher Carlson and EPIC, but WTC is currently its onlywholesale brokerage investment.

Mr. Hahn said he and Mr. Francis came up with the idea for thenew business model.

Mr. Francis built a retail operation–ABD InsuranceServices–rising to the position of chief executive there beforeteaming up to launch EPIC three years ago. Together with a privateequity fund owned by Stone Point Capital, they committed $100million to start the California retailer with an investmentstructure providing equity stakes to employees, producers andexecutives.

Given their experience and insight with both distributionmodels, they saw that the wholesale brokerage industry currently“is severely disjointed and fragmented–with high transaction costs,low retention levels, and a move of leverage and control ofbusiness away from the retailer,” according to Mr. Hahn. “With thestrong retail foundation of EPIC in place, we determined that theWTC model would likely appeal to other retail entrepreneurs.”

To further explain the fragmentation, cost and service issuesthey observed and to provide more specifics of the WTC story, Mr.Hahn, Mr. Cappel and John Jennings–the former president of CrumpInsurance Services, who was named president and CEO of WTC latelast month–responded to a series of questions submitted byNU.

Q: Why is a new model isneeded?

Mr. Jennings: This model will help retailersreduce the fragmented manner that has unfortunately been thetraditional wholesale placement model. In partnership with WTC,retailers will be able to develop comprehensive placementstrategies to better serve their clients, increase transparency andreduce frictional costs.

Q: Why will clients be better served by the Co-Opmodel?

Mr. Jennings: The model offers more focused andconsistent service to a manageable number of retail broker members.They will also benefit from a team-oriented approach to service andexpertise that maximizes the value proposition on each transaction.The current wholesale model has each broker working only his or herown deals.

Q: When you say that the wholesale brokerage industry isfragmented, do you mean that there are too many wholesalers? Do youanticipate more consolidation among wholesalers?

Mr. Cappel: Over the past 10 years, there hasbeen a steady stream of acquisitions and mergers among the largerfirms, but this has also created many spin-offs withdisenfranchised individuals creating new firms. All of this leadsto the fragmentation of the wholesale industry.

Retailers are realizing that their business is being leveragedwithout their participation in the decision, and instead of usingfive or six quality wholesale firms, retailers are now usingpotentially scores of firms with the need to reel them in andregain control.

Mr. Jennings: The recent consolidation ofwholesalers has fundamentally moved the issue of control, leverage,transparency and effectiveness to ever larger “national footprint”wholesalers. Recent activity has seen this leverage being exercisedwithout the retail broker's (and ultimate client's) knowledge–with“consent” being sought after the fact when pressure is exerted tomove business.

Very simply, the WTC model places the retail broker in controlof the business with and for the client–with full transparency anda direct alignment of interests to WTC and, in turn, to specialtycarriers.

Q: How will the Co-Op approach increasetransparency?

Mr. Jennings: Because the fundamental tenet ofthe WTC model is that of partnering with our retail brokermembers/owners, all commission and revenue data will be fullydisclosed and shared, creating a completely transparentrelationship.

In addition, the traditional reluctance to connect the retailbroker (and the buyer) with the specialty market is eliminated.

Q: What frictional costs exist today, and how does theCo-Op lower them?

Mr. Jennings: Traditional wholesale businessturns over every two to three years. Wholesale brokers wind upspending much of their talent and resources chasing new business.The “costs” to wholesalers, retailers and specialty carriers ofwasted time, low productivity, low hit ratios, and lack ofstrategic thinking and product innovation are addressed directly bythe alignment of financial interests that is core to the WTCbusiness model.

Q: The WTC announcement talks about “consolidating theuse of intermediaries.” Can you contrast this to a retail agentcluster model, or address why this model is better for the retailerthan simply combing the market and choosing to work with a selectfew wholesalers?

Mr. Jennings: In effect, WTC works with itsretail broker members to assist in the evaluation of all of theirintermediaries–and the identification of those that provide lowquality or commoditized service.

The aggregation of data reflecting all business placed in thewholesale distribution system by our retail members (not just datarelated to the business we place) allows WTC to develop productsthat otherwise would not be available to an individual firm.

The effective use of data in conjunction with the needs of ourretail broker members is among the most important differentiatorsof WTC from a traditional transactional wholesale broker.

Q: WTC will not be the onlywholesaler that the retail broker owners use for specialtyinsurance placements?

Mr. Jennings: WTC will be one choice for itsretail broker members. We will work with them to consolidatebusiness into appropriate value-added intermediaries at theirdetermination.

Q: How will this model add to the profit margin ofretail broker members?

Mr. Cappel: Retail broker members' profitmargins will be positively impacted by reduced costs throughconsolidation of existing intermediaries, higher retention ratios,enhanced productivity for all parties to the transactions as wellas by participating in revenue sharing, dividends from a WTC equityposition and the growing value of that equity.

Q: Will WTC only be providing wholesale insuranceplacement services to the retail broker owners?

Mr. Jennings: We have made room in the model totrade approximately 20 percent of our business with non-Co-Opretail brokers who have prior trading relationships with one ormore of our key staff.

We also want to create an opportunity for other independentfirms to “test drive” our team/model to determine if a Co-Opmembership makes sense for them.

Q: What is the size range of prospective retail members?How is WTC choosing among those that have an interest inmembership?

Mr. Jennings: We expect that the majority willbe among the 100 largest privately held brokers in the U.S.

Mr. Hahn: The selection process will reallyrest with retail broker firms. Certainly, we are looking for retailmembers that share the common goals of serving clients and creatingefficient trading relationships in the specialty market. Theseretail brokers also embrace the goal of creating a “club” mentalityamong the membership–where there is a fundamental level of trustand where members can maximize business and distributionopportunities together.

Q: How do you respond to early critics who suggest thatretail broker ownership somehow introduces a conflict ofinterest?

Mr. Jennings: Nothing in the WTC model createsa conflict. We are partnering with our retail broker members tobring the best solution possible for their clients, even if itmeans a member uses another wholesale firm that we/they believe hasa special expertise that WTC does not currently provide. Our modelis premised upon the alignment of interests of all parties to thetransaction.

Q: Many WTC executives have backgrounds with Crump orTri-City.

Mr. Hahn: It implies only that the people westarted with are known quantities that we wanted to be in businesswith. As we grow, the group's background will be very diverse.

Q: Several U.S. offices are planned. Do you envisionincluding international members at some point?

Mr. Jennings: International expansion iscertainly possible. With the importance of the London and Bermudamarkets, we will look to partner with select high-quality providersin those markets.