NEW YORK–Diversification and managing costs are crucial for brokers as they navigate through the current soft market conditions, according to a panel of chief executives from insurance brokerage firms.
Their observations came during the Standard & Poor's "Insurance 2008 Conference: Operating Within a Global Economy," held here yesterday.
Martin P. Hughes, chairman and chief executive officer of Chicago-based Hub International, said he believes this soft market cycle will last longer than many believe, in part because many carriers believe that the market is fine.
With the market conditions in mind, brokerages that can diversify the lines they are exposed to can mitigate the effects of the soft market, said Mr. Hughes, with the other two chief executives on the panel in agreement. Mr. Hughes noted that personal lines is not as volatile as commercial lines, for example. The rates in personal lines are being reduced, he said, but at a manageable rate, unlike commercial lines. Other business, such as employee benefits, is still doing well, he said.
Mr. Hughes explained that his brokerage also benefits by doing business in Canada, where the market is much more stable and the talk among companies there suggests that the soft market is beginning to turn.
Michael J. Sicard, chairman, president and chief executive officer of Briarcliff Manor, N.Y.-based USI Holdings Corp., added that it is important to be involved in different segments, but brokers must also understand which segments are growing in order to fully take advantage of diversification.
Cutting costs was also cited by the brokers as important for surviving the soft markets. John Howard, president and chief executive officer, wholesale broker Crump Group Inc., based in Roseland, N.J., said that a brokerage cannot control revenue in this market, but can control expenses. He said his firm has identified offices where duplicative services were being performed and eliminated redundancies. The firm also benefits from investments in technology that have helped operations run more effectively.
Mr. Hughes said consolidation of services is a major initiative underway at Hub.
On the issue of contingent commissions, and their continuing relevance to the brokerage community, Mr. Hughes said he does not believe that a competitive advantage exists for brokers who accept contingents and supplemental commissions over those who don't.
He said contingent commissions are an important source of revenue for his brokerage, stating that they make up 7 percent of overall revenue.
Mr. Howard said contingent commissions make up a "relatively small amount" of Crump's total compensation. He noted, though, that these types of commissions are "high margin." He also pointed out that, as a wholesale brokerage, he does not have to deal with the conflict-of-interest issues that retailers must contend with.
Regarding the fallout from the investigations into this type of compensation, all three panelists agreed that it made brokerages "look inward," and they also stressed the importance of quality and integrity as crucial components of their operations.
Mr. Hughes said Hub International has a zero-tolerance policy for breach of integrity. The fact that the firm has terminated people over this issue has emphasized the brokerage's commitment in this area.
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