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

While that part of the answer is similar to answers given by industry veterans Patrick Ryan and Glenn Hargrove, who launched new wholesale operations earlier this year, the rest of Mr. Hahn's response explains why the ownership and delivery model for his firm is different from the rest.

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

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

Mr. Hahn, whose experience in the wholesale business includes building Tri-City Brokerage and serving as president of BISYS Commercial Insurance Services (now part of Crump), co-founded retail brokerage Edgewood Partners Insurance Center with another wholesale veteran, Dan Francis, back in 2007.

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

In addition to EPIC and other retailers, the new wholesaler will also be jointly owned by WTC executives, sponsors and select financial partners, including Islington Holdings LP, an investment firm managed by Mr. Cappel.

Mr. Cappel said he has invested in both retail and wholesale brokers over the past 15 years. Islington, he noted, has numerous investments in both public and private companies, including retail brokers Beecher Carlson and EPIC, but WTC is currently its only wholesale brokerage investment.

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

Mr. Francis built a retail operation–ABD Insurance Services–rising to the position of chief executive there before teaming up to launch EPIC three years ago. Together with a private equity fund owned by Stone Point Capital, they committed $100 million to start the California retailer with an investment structure providing equity stakes to employees, producers and executives.

Given their experience and insight with both distribution models, 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 of business away from the retailer,” according to Mr. Hahn. “With the strong retail foundation of EPIC in place, we determined that the WTC model would likely appeal to other retail entrepreneurs.”

To further explain the fragmentation, cost and service issues they observed and to provide more specifics of the WTC story, Mr. Hahn, Mr. Cappel and John Jennings–the former president of Crump Insurance Services, who was named president and CEO of WTC late last month–responded to a series of questions submitted by NU.

Q: Why is a new model is needed?

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

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

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

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

Mr. Cappel: Over the past 10 years, there has been a steady stream of acquisitions and mergers among the larger firms, but this has also created many spin-offs with disenfranchised individuals creating new firms. All of this leads to the fragmentation of the wholesale industry.

Retailers are realizing that their business is being leveraged without their participation in the decision, and instead of using five or six quality wholesale firms, retailers are now using potentially scores of firms with the need to reel them in and regain control.

Mr. Jennings: The recent consolidation of wholesalers has fundamentally moved the issue of control, leverage, transparency and effectiveness to ever larger “national footprint” wholesalers. Recent activity has seen this leverage being exercised without the retail broker's (and ultimate client's) knowledge–with “consent” being sought after the fact when pressure is exerted to move business.

Very simply, the WTC model places the retail broker in control of the business with and for the client–with full transparency and a direct alignment of interests to WTC and, in turn, to specialty carriers.

Q: How will the Co-Op approach increase transparency?

Mr. Jennings: Because the fundamental tenet of the WTC model is that of partnering with our retail broker members/owners, all commission and revenue data will be fully disclosed and shared, creating a completely transparent relationship.

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

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

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

Q: The WTC announcement talks about “consolidating the use of intermediaries.” Can you contrast this to a retail agent cluster model, or address why this model is better for the retailer than simply combing the market and choosing to work with a select few wholesalers?

Mr. Jennings: In effect, WTC works with its retail broker members to assist in the evaluation of all of their intermediaries–and the identification of those that provide low quality or commoditized service.

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

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

Q: WTC will not be the only wholesaler that the retail broker owners use for specialty insurance placements?

Mr. Jennings: WTC will be one choice for its retail broker members. We will work with them to consolidate business into appropriate value-added intermediaries at their determination.

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

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

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

Mr. Jennings: We have made room in the model to trade approximately 20 percent of our business with non-Co-Op retail brokers who have prior trading relationships with one or more of our key staff.

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

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

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

Mr. Hahn: The selection process will really rest with retail broker firms. Certainly, we are looking for retail members that share the common goals of serving clients and creating efficient trading relationships in the specialty market. These retail brokers also embrace the goal of creating a “club” mentality among the membership–where there is a fundamental level of trust and where members can maximize business and distribution opportunities together.

Q: How do you respond to early critics who suggest that retail broker ownership somehow introduces a conflict of interest?

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

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

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

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

Mr. Jennings: International expansion is certainly possible. With the importance of the London and Bermuda markets, we will look to partner with select high-quality providers in those markets.

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Wholesale Veterans Launch Brokerage Co-Op; Retail Clients Are Part Owners

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