Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

You have a lot of experience in the insurance industry, so maybe we'll start with how you got into the wholesale business and what you did there.

Before wholesale, I was an underwriter for 10 years, and I was a retailer at J&H Marsh for five. Most of my coworkers and friends at J&H were making changes; Marsh had just purchased us, and people were going to Willis or Aon, so I decided to come to the wholesale space. I started at a company called Bryson which later became Swett. From there, most of my career has been property, but for the last 10 years, a lot of it has been general liability as well. I do a bit of both. Most people just specialize in one. I've spent about 15 years at CRC, running the New York office and always running the property team. But running an office takes an awful amount of time, and I wanted to make good money, so it was hard to balance both. They gave me some help to run the office so I could focus. New York people and New York clients are very challenging. They want all of your attention. All of it, 24 hours a day, they want you to tend to them. I work very long hours for that reason.

So you left, and you worked for another company that was bought by Amwins; is that how it happened?

That's correct. When I was at Swett, I went to a company called New Century Global. Later on, New Century Global moved into Amwins. It was part of the same leadership, so they changed their name to Amwins. So I worked at very small places that became very large, and CRC is the one large place in wholesale that I went into, and it was already a large place. CRC is always teetered between one and two with Amwins, and then RT came on the scene, and that kind of took over. I've worked from small to large and in between.

How about you describe how an E&S or wholesale broker adds value and fits into the whole insurance market?

Many retailers will come to a wholesaler when they lack markets to get something done, or they have something very niche, and they don't have the department that covers it, like stock or fine arts. But typically, most retailers come to us for the markets that they don't have or don't have relationships at, and they want that market on an account because they're currently priced to get the account needed. Maybe a client has just real estate experience, and they have a sudden manufacturing account on their desk, whereas other markets do that; it's not the same as retail. They'll come to a wholesaler to fill in that expertise and with the marketplace.

I'm really a broker's broker when they can't get it done, or they'll partner with me because they realize I have very strong relationships in the marketplace, and they want to be a part of that. They realize that will help them get the edge to write that account or keep that account if it's a renewal for them. California earthquake and Florida-Texas wind are typically non-admitted markets, so you have to come to a wholesaler to do that. Especially if you’re writing a lot of Florida and Florida only, you'll need to access a wholesaler. We have those specialties – wholesalers in windstorm and California earthquake markets – who write those risks.

As a wholesaler, you're not only placing people in the non-admitted market, you’re helping them with stuff that they just don’t have exposure to that may be in the admitted market as well.

Yes, that’s true.

What do commissions look like on these things? How does that typically work?

It’s usually 15% to 17.5%, and we typically have to give our retailer 10% at a minimum. There are times that they want more, so we have to cut back our commission to allow them to get either 11% or 12%. Every market is very different. Not every carrier will give you over 15%. Most stick at the 15% mark.

Walk me through what a transaction might look like.

Somebody's looking for Florida wind, and they come to me, and I have specialty markets that do that. Let's say the premium is an average of $100,000. In that case, those markets give 17.5% because they realize there’s a lot of work involved. The wholesaler has to file the surplus lines taxes, take care of all that ancillary work that a retailer doesn't have to do, so they pay 17.5%. If the premium is $100,000, we give our retailer 10% or 11%, and we get anywhere from 5% to 6.5% on that transaction. That's just about every transaction. Sometimes you're going to layer a program. One carrier isn't enough because it's a very large account. Let's say that values are $100 million, for argument’s sake, then you need to engage five different carriers.

This could be real estate in a coastal area?

Correct, absolutely. I'm working on something like that right now; $100 million in Florida, literally on the beach. Very, very coastal. They’re looking for a $100 million limit, so I’ll have to engage a few carriers to fill that in because not one person wants to put up $100 million for Florida wind. Each carrier might have a varying degree of commission, so it will vary on what we’re going to collect on that deal just based on the carrier. Normally it’s about 5%. Wholesalers really can’t charge fees on stuff because the surplus lines administrators and counsel don’t want you to collect too many fees. So, here’s your commission; that's what you get. You can't say, you know what? I want a $2,500 fee because I worked particularly hard on that one. You can't. The Florida state surplus lines people don't allow it; they usually have a minimum of $50 to $100 if you're going to do the surplus lines. They feel that that's enough money. We're not charging any kind of exorbitant fee.

I was going to ask you that because I see a lot of the wholesalers are commission only. That explains it.

Very true, but there's one exception. Many people on the West Coast seem to be able to charge fees. They don’t have that same restriction for some reason. In New York, I have restrictions on any kind of fees I can charge. But when I work my California office, they tend to charge $5,000, and their clients don't balk at it. Here in New York, if I charge a $50 fee, my clients will ask me, what is that for. Well, I've been working like a dog. Often my clients don't do any marketing, and they just sit back and are like, where's the quote, where's the quote, where's the quote? So, you've done nothing on this account. I'm doing all the work.

Sometimes we get a binding order; sometimes, we don’t. So we'll do a lot of work, and we won't get any reward at the end of the day. We won't get that order. You have to see a volume of submissions to keep your income up. You'll have renewal income, you have to keep that, but everybody has a new business quota that they have to meet, and because there are times that it’s not guaranteed you’re going to win, you have to have a whole slew of accounts to balance that out.

When you were at Amwins, did they take it to Amwins and RT? Or would they just take it to you and work with you, and you come up with what you come up with?

It depends on the client. Note that in certain areas, in Florida wind, only five carriers write there, so if you're going to go to two wholesalers for that, you're going to have people fighting. Who's got access to what? If you trust your wholesaler and know that they're going to go to all those markets, it's best to use that one person and let them go to all the markets and follow-up. Because when you get two people involved for five markets, nobody wins. I might have to do the primary, and then the other wholesaler has to do an excess and it just gets very confusing for the retailer. So often, they'll just go to one wholesaler if they trust you. That's not the time to try out new people. That's when you're going to go to the person you've been working with for many years. You know their work, that they respond to you quickly, and they follow up with all the markets.

In some cases, yes, they try to do that, or they've done that already. They've gone to people they didn't know at RT or Amwins, and they come to you because they know that you might be the person that will get it done. Now you're blocked in the market. Now we go through crazy waiting periods with broker record letters because they may have gone to someone who's not interested. It's not their tried-and-true client they can trust to give them the order, so people just put it on their desk, and nobody works on it. The best bet, when it's tough, is to go to the wholesaler that you trust, the one you've worked with for many years, and you know that they're going to get the job done.

Does the size of the account matter? If it's a $100,000 premium versus $100 million, does it matter?

Certain people specialize in the large stuff, and that's me. My happy point is when the TIV is $150 million and above.

TIV meaning total insured value?

Correct, on the property side. To me, that's a large account. Middle market accounts tend to fall in the realm of a total value of either $15 million to $100 million, and you have a certain sector of markets that do middle market. And then you have a certain sector market that does large. I can do all of it. A wholesaler doesn't want a business model on someone who writes purely small accounts. They don't want someone that's just going to get $300 per account, where the premium is $1500 to $10,000; no wholesaler wants to do that. Many wholesalers have created a specialty spot in their realm of sending those little accounts here. You do big accounts? That's what we want you to focus on. CRC has created something called CRC One. They've got about five brokers; they’ve got access with a pen for certain markets. You send those small accounts to them, it gets done, and you don't have to worry about it. Those small accounts are often just as hard to work on as some of the large ones because the client is so price-conscious. They want the best price.

Labor intensity is pretty similar? The size doesn’t matter so much?

That, and also if you're going to run a book of very small accounts, you're going to need about five people to service that because you're going to see heavy-duty volume whereas there aren't a lot of larger accounts. If you work on one account, you're going to work that one large account with seven carriers to get that done, but you're going to see an income of at least $10,000 and above to the company, you don't need that many people on those teams. Maybe you have a broker and a servicing person.

When you have those little books of business, you need that broker, two assistants, and a service person because the volume is more intense. So many big wholesalers don't want that kind of book of business. That's why we've created a certain little department that will handle that. It's geared to that, they've got the right amount of people there, and you've got the right person focusing on those larger accounts for you. They don't have to worry about all the little stuff. Many wholesalers don't want little accounts at all.

Does the labor intensity come up more when you’re making the sale? Is that where a lot of the work is versus the servicing? How does that balance out?

On a smaller account, a lot of times, you'll just have one market you can feed it to. You don't have to market it as intensively because it's small; five markets write the small stuff, and you just send it to that one person, done. It's the backup. It's the surplus lines filings. It's all the paperwork that the carrier needs, so it's heavy on the back end, and that's where you need more people in a company versus a larger account which is heavy on the front and back end. You've got to get all the layers right and pricing right, and then you've got surplus lines to file, all of the paperwork that each carrier requires for them to file. It's very, very labor-intensive.

You've been in this business a long time. How has the trend been? Is it as difficult as ever? Does it get easier? Has there been more automation?

We want it difficult in a hard market, and here's why. Right now, just about every line of business is in somewhat of a hard market, except for cyber liability; there are more carriers to pay there. National Property and Casualty, when you’ve had a lot of windstorm loss and earthquake loss, tornadoes, the market tends to harden because admitted carriers do not want to provide any extra limits. They’ll start looking at their book of business and start to restrict writing in California, Florida, so now you’ve got to go to the wholesaler.

We like it when it's a harder market, obviously because we're making more money and seeing more business. The admitted carriers are not writing as much, and now it's back to open market, layers, and such. So you want that harder market and even a harder account because you have access. You're constantly in the marketplace building your book, building those relationships with the carriers instead of going to one carrier every seven months where you don't build a relationship. That’s why retailers come to us, too. Either they're new, they're small, or they don't have access to all the markets. Typically, they always have just Travelers in-house, and Travelers doesn't do everything, so they have to come after us for everything. You want to play in certain spots with the big boys, Marsh, Arthur J. Gallagher, and Aon, and then you've got that middle tier who just don't have the markets and rely on a wholesaler to do all of their business.

How sticky are these customers of yours? Do they stay with you? Is there a lot of churn?

Because I have a very varied history in insurance, underwriter, retailer, and wholesaler, my clients know that I do the right job for them. Often, I create their presentations for them, so in a layered program, it's best to draw a picture of how it all lays out – who’s primary and excess – and other wholesalers don't do that. They just give you the quote because they've only been a wholesaler. When you've been a retailer, you realize who a valuable wholesaler is in providing you the information and helping to make your job easier.

I'm very different from most wholesalers. I have that background, and I meet my insureds. I go on meetings with my clients, and I give presentations to them because my client might be a casualty expert and leave all the property to me. So very fortunately for me, I have 20-year plus renewals, which is unheard of. It’s unheard of for a retailer, and certainly unheard of for a wholesaler. It’s purely because I’ve met those insureds, they like the work that I do, they trust me, they know they can call me 24 hours a day. I get very involved on those bigger accounts with my clients for that reason.

Do you have a sense of the wholesale brokerage industry as a whole? Are retention rates generally pretty high?

Do you mean a renewal retention rate?

Yes.

Most companies would like you to have at least an 85% to 90% renewal retention, which means you don't have to constantly rewrite them every month. You’ve got guaranteed income, and all the new business you're doing is a bonus. They want to count on a minimum of 90% for an individual, and then you can budget a 5% increase because we also have to do projections for next year. Typically, people stay safe with 5% because that’s a number that’s easily beat and reasonable to most upper management. A good wholesaler has about an 85% to 90% renewal retention.

And if you're slipping below that, I guess they would come and talk to you?

Yes. Covid has changed the wholesalers' dynamic. Usually, we're out entertaining clients, getting it to new people, meeting new people. New York people don't want to do that over a phone call; they like you to take them to lunch, over dinner, go to a show. They want to be schmoozed. That is different for a smaller company. They're stretched, they have a lot of work to do; don't take me to lunch, just do my work for me. But the larger companies have that time, and since we're in a Covid place right now, you can't get out and meet new people.

Luckily for me, I know all those people already; I've been doing this a long time. But if you're a new person coming into it, it's a difficult time. You're not getting out there; nobody knows you. People want to see who they're talking to all the time, and they want to know who you are, have a good feeling for who you are as a person, single or married. Believe it or not, that is a very important issue. I've had a lot of young men work with me, and a lot of the time, clients want to know what they're about. I've had a guy say, I'm living the dream. We come back, I get back to the office, and my client says, who is this guy and why is he living the dream? So you just tell them, please, just say hey, I hadn't met the right person, because people get insulted that you're living the dream and they're not.

You have to know your audience very well, how they are and what they look for, and that's how you become more successful, by the fact that they love you and recommend you to the other people in the company, or a friend. Everyone’s coming from another company, so hey, when I used to work at Arthur J. Gallagher, they're looking for someone, and that's how you get more business, word of mouth, and being reliable and a consistent individual.

I wanted to ask about this idea that the wholesale market has become a larger share of the overall insurance market over time, and I want to know why you think that happened and how likely it is to continue. Are we in some sort of bubble where the wholesale market is big, and it's going to revert to where it was, or are there more permanent reasons for it?

I think there’s always a permanent reason, purely by the nature of the Florida wind stuff, the California earthquakes. People need that coverage, banks require it, so there'll always be a need for wholesalers just based on that tougher-to-place account. Wholesalers are consolidating; they're all buying each other up at this point. That's a thing too. The reason why wholesalers buy smaller wholesalers is to get into a market share. Let's say RT Specialty doesn't have anybody great in New Jersey, so they'll go and look for a New Jersey wholesaler that specializes, and that's when they can bring that into their fold. Often, wholesalers grow by new business and by buying up smaller wholesalers. It's organic, or it's true pedal to the metal there, going out and bringing in the business.

Most wholesalers try to buy MGAs or create them because you want to create a specialty market that no one has and that people have to come to you for, and so then they’ll send you all the other business because you've helped them out on that tougher account. That's why many wholesalers create an MGA themselves, or they buy MGAs. They realize that they want to be the one that stands out that writes a tough habitational, like frame habitational, it's the bane of our existence, but it's also very hard to place. Many markets get in and out of that because it's always a frequency of losses, a severity of losses, and it's always a problem.

You have very few frame writers that really like to write frame. When you need a new carrier, it's always like, we don't do frame or habitational but yet you can imagine the nature of, just us as humans, we all have to live someplace. Not everybody owns a home so, you've got a condo, an apartment, all that stuff. That is really what every wholesaler is looking to do. Find that unicorn that writes frame habitational. You can get everything else done. It's that frame hab that tends to become a problem; severity, and frequency of losses in that case.

I think that wholesale is here to stay. Whether or not they buy each other out is a whole other issue. I am on the board of directors of St. Johns, in the insurance division and for the regular school, and I also consult to Columbia. Many students now in these programs are concerned that we're going to have more people just buying insurance online versus going to a broker, so I was there to discuss that, and one young person said, will there be a job for me? Do you see that the retailers will buy each other out? Most people try to start with the retail side. I said, listen, there's always the need for a wholesaler. We're experienced people, and we tend to be older. Very few wholesalers are 22 and 23. Most of them tend to be 35 and above because you need to hire that experienced person who has seen it all.

I don't think that this online platform will ever edge out real brokers. You can fib on those programs. You can not put on all your losses and lie, but guess what? Eventually, that is going to blow up. All of a sudden, those online programs have extreme losses because the individual completing them has fibbed a little bit to get a better price.

You say it’s very difficult to replace a wholesale broker with some online thing.

Absolutely. Because again, if you've got 25 clients and they're all lying about losses, and next year you've been hit with $5 million in losses, well, you didn't make a profit, and you've got to consider hiring individuals to underwrite that business now. Again, when you're getting involved with brokers and wholesalers, they've got access to platforms where there's no more fibbing about losses. You can find that out, you can look at Google Earth and Google, Zoom, and all these different things, and you can find out. There's no more fibbing. On the platforms, they don't have that access; they just want you to input information, they'll shoot you out a quote, and oh, let's hope for no losses. But a wholesale broker adds value. The larger accounts will never go to online platforms. That's geared for premiums under $5,000.

However, even if it's a small account where you spent $1,000 on insurance, you could have $5 million in losses, depending on the values the general liability aspect of it. The online platform is nice for a certain sector of businesspeople, but for the rest of the world, Coca-Cola and Pepsi, they have to have an educated broker to say, you know what? You're not covered here. Let me look at your exposures and tell you. You don't have cyber; oh, you don't have this part in your liability. Online portals don't provide that. They don't say, let me recommend something to you. You put in the information; here's your quote based on that information. Wholesalers and real brokers will never go out of style, even if they're buying each other up. I don't think there could ever be one retailer, one wholesaler, because you need competition. State regulators want competition; they want to make sure that you're not giving rebates; insurance 101, you've got rebating, and all these different things, there has to be fair competition.

Who polices on the underwriting side? You worked for Amwin, so if you're a wholesale broker and there are losses on a lot of stuff you underwrite, is Amwin the one who comes to you and says something's wrong, or is it the carriers, or both?

The carriers.

The carriers are going to be like, hey Amwin, what's the deal? I got this broker here.

Correct. Say you have one broker; let's name him Charlie. Charlie keeps writing this terrible business, and everything is falling to losses. The underwriter will say, look, either I'm going to close your company down, or you have Charlie stop sending me business; they're ruining my profit line. Insurance is geared for some losses, but you may have that one individual; here's where programs grow up. You've got an MGA program and Charlie's best friends with Harry. He puts all that business with Harry, and Harry has no profit lines. Harry gets fired. So you have to prevent that collusion of hey, Harry's my cousin or my brother, and I'm putting all my terrible accounts with him. But there are so many losses it’s just a terrible situation for a carrier to be in.

A brokerage company doesn’t do that for the individual, but a retailer looks at the losses very carefully. You come to us, and we're helping you mitigate those losses by suggesting deductible options coverage options. Still, if it's typically going to have losses, it's harder to place on the wholesale side. A company like Amwins or RT isn't going to look at that individual’s book and say, hey, you have a lot of losses, get out of here because you could also have a lot of good accounts that balance that loss-sensitive account. That's regulated at the underwriter and underwriting company's spot.

You mentioned competition, and they're buying each other up. I've read about this as well, different trends. It seems like retail brokers have shrunk how many wholesalers they want to use. I understand that in the old days, a big company might have 20 to 100 wholesalers, and now they're down to two or three or something like that. I don’t know if that’s true.

It is true, yes.

What drives that? Is the preference to deal with fewer wholesalers, or is there an advantage to being a bigger wholesaler? I suppose there is.

Yes, so the reason people do that it like I mentioned before, there are limited markets that write any one risk. It's best to go to one wholesaler who has all those markets. If you go to four or five, they're going to say, listen, you already went to the markets, what do you need me for? I don't have any other unusual market that would write this other than the first wholesaler you went to. A lot of people are backing off of that just to keep continuity. We don't want 75 wholesalers, and we don't know each experience level. Aon might say, I just want to deal with Amwins and RT, I know who they are, I know the people there, I can ask for more commission because I'm giving them more business, I'm directing that business. On each account, I can say, you know what? I give you my business exclusively, and I want another point on this account. They immediately see the results by asking for more commission because you’re feeling them constantly.

When you're feeding 25 wholesalers, you don't have any power. You're just giving them accounts as they come in. When consolidating to two or three, they typically consolidate to the bigger ones and a smaller one. It’s that individual they've been working with, and they know the marketplace and they have some niche markets. That's the only case. I've been that, at CRC, which is on everybody's list except for Aon.

A lot of times, retailers have a wholesaler buy into them. Not every time, but Aon or somebody may have a fee, and if you'd like to do business with them, you've got to pay a million-dollar fee yearly just to do business with them. That's not a bad thing. That's bringing the cream to the top. Even Aon wouldn’t have access to every retailer because they’ve charged a fee, and CRC didn't want to pay that fee. $1 million or $2 million dollars is very hefty, and on top of that, you've got to give each individual broker more commission. So that's why these guys do it. They're getting fees for you to work with them, and they're demanding more commission on every deal.

Is there an advantage to being an independent wholesaler like Amwins or RT versus Truist or somebody that's buried in retail?

There is. When I worked at Swett, we were owned by Aon at the time. People felt that Aon could easily look at the database for any account on my desk and try to go after it. Believe it; many people feel that way, especially the smaller, midsized retailers. They feel like, hey, I'm feeding Aon's pockets, why would I want to feed their pockets, and now they have access to all of my information through data input. So it's always best to be kind of independent, and everybody feels an equal player to you. You’re not feeding their competition, so that's the reason. When you're embedded in a company, you feel that they are feeding you, so you don't need their business, and they won’t look at your business fairly. HUB, for example, says, oh, you're doing all that Aon business, you don't need my business; I’ll go to somebody else. It's all perception. Is that really true? No.

When I was at Swett, I never felt they had access to my information to go after my other retailers' accounts. A lot of Aon people never use Swett people until they get beat on an account, and that was my strength. I didn't go after it, but I had a few accounts where it was an Aon account, and an outside broker came to me. Aon lost it and said, why am I losing an account to you? We own you. It's a perception by people. Is it a reality? I don't think so. I don't think that Swett was selling any information to Aon so they could go after that business at all. But people feel that way. When you're a midsized person and looking to grow your business, it’s really important to you to have a good wholesale partner because they’re going to have the markets that you don't have, and they're going to work just as hard as your own employees on an account.

How do you think the wholesale brokerage business will shake out over the next, let's say, 10 years? Do you think the Amwins and RTs will continue to be the dominant players that take most of the market?

Yes. Part of that is money, and I saw some of the questions, and one of them is, would a wholesaler attract better people because it has stock.

Yes.

I can talk personally about that. CRC gave you a lot of stock as part of the compensation. People want to feel like they’re part of a company, that they've invested in the company, and the company invests in them. At the smaller people, they don't really have stock. Some do, some give you a partnership. It depends upon your experience and your role. Still, yes, it is attractive for an individual to go to those larger people for that stock benefit because they will hire older people who have experience. Those people are now planning for retirement. Once you hit 40, now you're planning for retirement. Under that, you're like, my whole life is ahead of me; I'm not going to worry about that. But once you hit that, you're worried about your 401K plan, stock options, all that stuff. So yes, that attracts good talent, having that background.

But I feel that there will be further consolidation; people are always buying up people. That's never going to stop the M&A mergers and acquisitions situations because that's how these companies grow quickly. RT grew quickly by buying up other wholesalers and MGAs. In reality, they took a couple of hundred people from CRC, maybe 50 people to start with, and started RT. All those were CRC people. They've grown quickly by buying up everybody else. Having Patrick Ryan’s capital and money to invest has helped them. And again, they've offered stock because that's how you get the best talent.

This is not a job for lazy people. You have to work. There is no nine to five job in wholesale. This is how you tune an individual to be successful. Yes, you'll have people we report to, but basically, they make it that you report to yourself. If you're working hard, you're going to see some results. Whereas if you're an underwriter or a retailer, the company makes all the money. On the wholesale side, you're getting a little bit more of the share, but you've got to get out there and hustle. There's no sitting around and saying, oh, I'm not going to do that, oh, I'm going to blow the afternoon off drinking because you’re missing accounts.

I haven't had a vacation in 12 years. I don't take vacations because then I'm missing out on opportunities. I typically work from 5 a.m. to 11 p.m. I have London in the morning, and I have California, Seattle, the West Coast in the evening. So my gears are always turning. Monday through Friday is one very long day. Not everybody works this way, but if you get a successful person who wants to succeed, you have to put in the time. You have to be available to clients at all times. You can never say, I’m in Italy for two weeks, have a good day. Even if you have a good team under you, your retailer will want to talk to you. Retailers always want to be connected to you, no matter what. So there’s no vacation, and I refuse to spend $5,000 on vacation only to work hard on vacation. So this is why I haven’t done that. I love what I do.

You just said it. I've heard that it's a lot of work, but then I've also talked to people, and they all love it. They all seem just to love being brokers, being in the business.

Yes. I’ll sit with young underwriters – you meet people all the time – and I'll say, this young underwriter's going to be a broker. They've got that go-to spirit. It's an unusual character to be a broker. You've got to be a little pushy, you've got to have a swagger, you have to be aggressive. You have to constantly push people to write it; come up with a new idea to get somebody to write that risk. That's why having that successful underwriting and retail experience has helped me greatly in wholesale. One, I’m meeting my insureds because I’ve done that, I’ve done those presentations and my underwriters trust and respect me because I've been an underwriter. I know what it takes for them to give a quote. I'll gather all the information they need to make this a very quick decision. The more work you save an underwriter, the faster your reply will be, and again there's always speed in our work. A person will give it to five wholesalers, and it's the one who comes back with a good deal first.

Now, however, they'll take that deal and try to beat it every other day. Can you get $5,000 off? Listen, that's a good deal. Sometimes people don't know the good deal that they have in front of them, and you have to prove it to them by showing them a few other deals. Hey, see, this is what the marketplaces wanted on this class of business, so you've got the deal. Bind it. But there will always be multiple wholesalers, multiple retailers, just by pure competition. No one person could handle all the business. There’s a lot to go around.

Thinking about the risks that flow into the non-admitted market, some things will always be nonstandard, like with coastal. Some things are new and expanded like cyber, but have you seen things go in and out or migrate back and forth at the typical, or is it not typical?

Yes, frame habitational. Because again, that’s the easiest one to pick on because you can relate to that. We all live in a home. When it's good, it's a hard market, and the prices are up, more MGAs come in, and they'll do a primary five, or they'll do a 2.5 x 2.5 because the pound of flesh is there. When it's a soft market, it doesn't make sense because you will get losses at less premium. You’ll want to get in when the premium is high, and you're going to make some money off of it and get out when it's low. It's kind of like buying stock. It's knowing the marketplace for an MGA and getting into something where you know it's a hard market, and the premiums have risen. It's not going to be a 10¢ rate; now the rate is 15¢, so you just made a good 50% more on that account. Frame habitation is the one that drives the marketplace. Honestly, if you talk to 10 other wholesalers, they'll tell you frame habitational. It's the bane of our business.

But right now, we're in a hard market, and markets don't want to write frame now. They know there are many losses. Now, a wholesaler might have to get two or three companies, so now those companies have minimum premiums. Instead of something expiring at 100, now it's $250,000. Do you know how much money you just made on that? A lot.

A wholesale broker doesn't necessarily do poorly in a soft market.

No, because here's what happens. In a harder market, carriers reduce the commission. They feel that you're making money from the higher prices, which irks me that that happens. They'll lower it. They'll start giving 17,5%, 22%, 22.5% in a softer market. They want to counterbalance, and they're not going to give you 22.5% when you just made another 50% more in premium. They kind of keep everything even keel.

I was going to ask you about that because the last time there was a really hard market, from my reading, was like 2001 to 2005, but commission rates declined. You just explained exactly why.

Yes, because they feel carriers are making enough money off of the increase in pricing, so they're going to give you less commission. It never really drops below 15%. 15% is rock bottom. Carriers know that we have to give clients 10%. They know that, but they realize that much of the premium is halved when it comes to soft. Now you need to make a little more commission to stay alive. Even wholesalers want to deal with a select group of carriers, so they can say, I need a little more commission on this to survive. That's the whole commission thing.

How cyclical is this business over time, in your view?

I've seen a lot of cycles because I've been doing this for going on 40 years. It's driven by floods, earthquakes, winds, and the reinsurance market giving more capacity to the admitted carriers and them falling out. I would say every five to 10 years, there's a change. It goes back to being soft. And it takes an educated broker to start hitting the pavement more. Give me those accounts because you have to write more business to make up for that income. Now you can just write 10 accounts and make a good income, but a good wholesaler is always pounding the street, hard or soft market, and just building up their portfolio and having a lot of business to write.

It's always between five and 10 years. It rises slowly year to year. It always goes up five, 10, 15, it reaches the top and comes back. But unfortunately, when it comes back, sometimes it's not a 5% reduction, it's a 20% reduction, and that's painful. You can make up for a 5% difference, but 20% hurts. I've seen it on accounts. I've been an advocate to insureds. I have been with one really large municipality for about 25 years now, and I'll say to my clients, let's ask for less of a crazy reduction, and you'll get less of a crazy increase. Let's keep it with the same carrier, you've got ownership with that, you've got money in the bank if there's a very big loss, and let's do that by a small 5% increase instead of going, okay, 25% increase, okay 40% decrease. Even for them, it's hard to manage a budget.

If I'm on that case with my client for a long time, I say, let's be smart. Let's market it this year? No, let's not. Because if the market sees this account every year and never writes it, it's an instant decline. There's a gentle way of managing your business over time for the bigger accounts. Let's not have wild swings where you're not going to be able to budget for a 40% increase next year.

Even as a broker, you're trying to kind of manage the cycle a bit yourself, so you don’t have such big swings.

Right, and believe me, insureds who understand that get it. They're like, you're right. If you’ve been with them for a long time, they see that methodology; I don’t want to have a 50% increase next year. And by you managing the marketplace and managing my account, clearly, it’s 5%, 7%, 10%; things that are more manageable for all of us, instead of 40% to 50% up or down. Some of these insureds don't have a real risk manager. It's like the accounting department, so they don't care. They're just about show me the money, and the minute it goes up, they're like, oh, you've had a 40% decrease every year. It doesn't get down to the point where we pay you to insure you.

You’ll have a client that says I want 40% every year, then what happens to her at no premium? Do you think we pay you to insure you? It doesn't happen that way. It's about managing that renewal book over that kind of cyclical process because we see it coming. We see that Travelers is starting to write more business, or Philadelphia or some of the big ones, Great American or whoever it is; they're starting to steal accounts. People pay attention to that very quickly, and they're on it within a month or two of the change. It doesn't take six months to figure this out. For instance, last year London was stealing a lot of business, even from me.

I had an account with an admitted carrier, and they came in and undercut it by $150,000. My client couldn’t do that, and London never writes this kind of business. That’s RSUI; RSUI is a gigantic writer in the wholesale world, and they can do admitted and non-admitted paper. I talk to them every day because if they see something in a certain marketplace – maybe they're writing a lot of stuff out of Atlanta – the different sectors are on it right away. Experienced people want to know what's happening quickly and want to educate their clients much faster. Again, that's how you stay in business a lot longer by being a consultant. Not just marketing someone's account, but consulting people and saying, hey, this is going to change. If you don't manage this, it’ll change.

I have a niche in renewable energy, and I just want to share one quick comment with you. GCube is the largest renewable energy rider. Ten years ago, they were giving away wind and earthquake for nothing, and I said, guys, this is going to come back and bite you in the tushy. I'm enjoying it now, but how do I manage this client's expertise? And you know what? It happened. They started writing less and less and charging more money, but I educated my clients about it. I said, listen, enjoy this now. It'll change. I'm not going to be able to provide that next year. Again, it's all about being prepared in the marketplace. I prepare my clients and insureds when I see just a blip in that change.

What is your opinion on the idea that some of the wholesalers have binding authority versus not? What is that, and how does that matter?

That's very important. That's what I'm telling you, on that smaller to midsize book, they have binding authority with certain carriers. The company I'm at now, USG, has a lot of binding authorities. I don't access them because I write very large accounts, and there's no binding authority for a large account. That's the smaller to middle-market type business, so this company has to employ a lot of people to service that smaller book. With me, I'm a queen here because I write one account and make $15,000, and it's just me working it. I don't need a whole lot of people. People want that because they want to stand out from another wholesaler and market that, oh, we could get that quoted and bound for you in 20 minutes.

For some people, it's a speed thing, and that's what the binding authority offers you. If you know it, either you go in on a portal or whatever you do to underwrite it, boom, boom, boom, it's done, and you can put it to bed and focus on the bigger accounts. That is key, and here at USG, they claim they're a wholesaler, but they're not. They're binding authority with a few wholesalers to balance that out. That’s why they’ve hired me, to balance out all that binding authority stuff because you need markets and my markets open them up to getting into the smaller bindable markets. If I worked in Zurich, now they'll talk to Zurich and say, do you have any binding authority? And they've just got some for the binding authority. Believe me, that's the best way.

At the end of the day, wholesalers are here to stay. There's a whole non-admitted marketplace out there, not just for the coastal stuff but tougher accounts, loss-sensitive accounts, and admitted people won’t write them. Philadelphia's known for this; I'll get in, there are no losses on this account, I'll get hit with a loss, I'm off, back to the non-admitted carriers. You see it coming.

This has been great, and I appreciate all your input, insight, and experience.