This article appears courtesy of Reactions.
Before last Autumn, big was beautiful in the world of insurance broking. A wave of mergers in the late 1990s created three big powerhouses – Marsh, Aon and Willis. Their aim was to provide everything an insurance buyer could possibly want under one roof, which earned them the nickname of supermarket brokers.
But, on October 14 2004, New York Attorney General Eliot Spitzer sued Marsh, the biggest of the three, accusing it of rigging bids to obtain the highest possible contingent commissions.
This brought an abrupt end to the bigger-is-better credo. Many felt bid-rigging was the preserve of the largest brokers, simply because they were the only ones with enough market share, and therefore enough bargaining power, to persuade insurers to submit false bids.
Although this was bad news for the big boys – Marsh in particular – it was music to the ears of smaller brokers and those wanting to establish new primary broking operations. Talk about angry insurance buyers seeking comfort from smaller, more specialised brokers gave them the confidence to set out their stalls.
One of these was UK broker Benfield. Before Spitzer, it was almost exclusively a reinsurance broker. But now, it is the proud owner of a new primary insurance broking outfit – Benfield Corporate Risk.
The new firm was formally launched on September 6 this year. It mainly focuses on providing insurance to the marine, energy and power industries, but also handles aerospace and property/casualty business. It employs 129 people so far, although it has plans to recruit up to 200 before the end of next year. It has offices in London, New York, Houston, Singapore, Bermuda, Paris and Washington DC. Its chief executive is John Lapsley, the former global chairman of Marsh’s marine and energy practice.
In the beginning
Benfield first started its push into primary broking in the fourth quarter of 2004, shortly after Spitzer sued Marsh. The company had already amassed a small amount of primary business – aviation, aerospace and property/casualty – from acquisitions. But the fallout from Spitzer’s lawsuit prompted it to pursue the business more actively.
In April, the firm hired Lapsley to head up its primary broking efforts. On his arrival, he started laying the foundations for Benfield’s marine, energy and power practice, which would form the bulk of Benfield Corporate Risk.
The business plan he wrote was approved by Benfield’s board of directors on June 7, which Lapsley describes as the birth of the unit. There followed an intense period of hiring and meetings with potential customers and carriers before the official launch on September 6. At this point, the company shifted from merely meeting clients to formally offering them its services. Lapsley was attracted to Benfield by the desire to offer something different to insurance buyers than the three big brokers could. His experience at Marsh had convinced him that clients were crying out for something new.
“Although the mega-brokers were powerful in terms of global reach and market influence, I constantly heard from our customers and prospects that there was a need for more choice and more bespoke service,” Lapsley says. “In insurance broking, as in a lot of financial services, the bigger you are, the more business tends to commoditise, rather than specialise. Because of this need for specialisation, there was always a plan at the back of my mind to form a more specialised broker.”
When Benfield came along with designs to grow in the primary market, Lapsley saw his chance to transform his idea into reality. “Because of my interest in doing something different for marine, energy and power customers, and Benfield’s interest in penetrating this insurance market, it made sense for the two of us to develop Benfield Corporate Risk.”
Lapsley believes clients wanted a change from the big three brokers long before Spitzer shook the market up. But he says it would have been difficult to set up a new broker before the attorney general’s lawsuit against his former company.
“The need for a new broker has been around for five years, following the big consolidations,” he says. “The Spitzer action kicked off the formation of new brokers.”
He explains that pre-Spitzer, it was hard to tempt staff away from their old jobs. “It was very difficult to get a critical mass of senior executives,” says Lapsley. “The brokers’ stock prices were buoyant and most executives were compensated in share and option deals. Basically, a lot of folks were very comfortable. Spitzer shook that up a lot.”
Spitzer certainly seems to have helped Benfield Corporate Risk find senior staff. Six members of the new company’s eight-strong management team, including Lapsley, came from Marsh’s marine and energy practice.
Spot the difference
Benfield Corporate Risk is not the first new broker to be formed in the wake of Spitzer’s shakeup. Integro is probably the most prominent new broker. Like Benfield Corporate Risk, its management team is made up largely of ex-Marsh executives.
Lapsley acknowledges that the two companies’ desires to challenge the broking status quo are also similar. “It’s interesting to see that Bob Clements [Integro’s chairman], who I’ve worked with in the past, also sees the landscape changing and that there is an opportunity for new brokers,” he says.
He thinks that is where the similarity with Integro ends, however. He points out that the two firms have different specialties. Benfield Corporate Risk is focused on marine, energy and power. Integro covers a wider range of risks.
Given this, Lapsley does not see Integro as a competitor. He believes his main rivals in the marine, energy and power markets are the big-hitters such as Aon, Marsh, Willis, and Jardine Lloyd Thompson, as well as regional brokers in various parts of the world.
He thinks the focus of Benfield Corporate Risk gives it an advantage over its rivals, both new and established. The company has deliberately chosen lines of business that demand a lot of client service. Larger brokers, he argues, tend to provide a more commoditised product.
Because of this, Benfield Corporate Risk wants to avoid getting too big. It is targeting a market share of roughly 5% of the global marine, energy and power business – which it hopes to hit in three to five years’ time. “Size is not a determining factor in our business plan, but quality is,” says Lapsley. “We’re very disciplined about not chasing high-volume, low-value business. We want low-volume, high-value business. That’s where you can maximise your competitive edge.”
The company places particularly strong emphasis on claims advocacy – essentially making the claims process less painful for clients. Lapsley explains that claims in the marine, energy and power industries tend to be complex, especially if they involve loss of income or business interruption claims. He believes brokers that offer a good claims service can help clients a lot and, ultimately, this helps win business.
Benfield Corporate Risk’s structure is also different from its rivals, says Lapsley. The company is organised by industry rather than product line. “We concentrate on industry segments, and we build into those industry segments all the products that the customer requires,” he explains.
He says that many of the details that set his firm apart from its rivals – such as a commitment to claims service and its structure – have been born out of building the firm around what clients want. He says the firm is committed to understanding its clients’ businesses and giving them what they want.
“What real differential are you providing the customers if you set yourself up like everyone else? You’re then just competing on price and service,” he says. “We talk to them about their business plans and where they are going. We’d like to think that our people are more wedded to the industries of their clients than the insurance industry.” He adds that the bigger brokers would struggle to adopt this approach.
As well as being more nimble and focused than the larger brokers, Benfield Corporate Risk also has advantages over other start-up brokers, argues Lapsley. As part of Benfield, it already has an established brand. It can also use central group functions, such as accounting and marketing, saving it the trouble and expense of setting up its own.
Having a larger parent also helps it in another way: unlike other start-ups, Lapsley’s unit will not have to pander to demands of private equity firms. He explains that Benfield has a record of building businesses and understands it will take time before it makes a return on its investment. “If you are a true start-up, you are governed by who finances the operation rather than a company and a board that really understand the insurance business,” he says.
Also, smaller start-ups are unable to compete with some of the products and services offered by larger brokers. But Benfield Corporate Risk will have access to some of the functions its parent has developed over the years. The unit will have access to Benfield’s ReMetrics risk modelling capability, for example.
Lapsley thinks this is the most important benefit of being part of Benfield, particularly because it enables the company to distinguish itself from the kind of brokers that use their size rather than service to get business.
“Historically, big brokers have used their volume to get the best deals. That has turned around 180 degrees in the past in the past 12 months,” he says. “We believe the future is about being the smartest broker. We plan to use our existing ReMetrics platform and build upon it for the unique needs of our customers.” He adds: “The best deal is the smartest deal and frankly, we’re not attracted to customers who think the best deal is the cheapest deal, so it ties in very well with our strategy.”
All this has persuaded Lapsley that he made the right choice by partnering with Benfield rather than going it alone. “I’ve thought about this for a long time and I’m even more convinced now than I was in April that this is the best platform to succeed in what we are doing.”
A flying start
Despite the obvious advantages of the new crop of brokers, some have questioned how successful they will be.
Perhaps unsurprisingly, much of the criticism has come from the old guard. Michael Cherkasky, chief executive of Marsh’s parent company Marsh & McLennan Companies, questions whether poached brokers will be able to take much business with them. “It will be very interesting to look at the bottom line of these companies that have hired a lot of staff expecting them to bring in clients,” he told Reactions in an interview in September.
Lapsley, whose firm has poached a number of Marsh brokers, is dismissive of such criticism. “If you have the best model, you attract the best people and business,” he says. “Our process hasn’t been about acquiring people to acquire business. If you do that and you don’t have the best model, the business is not going to be loyal. It’s very important that in a low-volume, high-value proposition that business sticks around for a long time. This is about the development of long-term relationships.”
Regardless of Cherkasky’s comments, Benfield Corporate Risk’s plan seems to be working so far. The company has hit the ground running.
Lapsley says there was a lot of interest in the firm between the approval of the business plan and the official launch. “During that period we had many enquiries from potential customers but, because we weren’t up and running, we were very disciplined about the business we accepted,” he says. “We have had several early accounts, mostly from the US.”
Although it has only been open for business since September, the company already has six marine customers. These include Seacor and Seabulk, which both manage fleets of marine support vessels and which merged on July 1, and Idemitsu, a large Japanese refinery.
The company also has a number of prospective clients. “We have about 20 live inquiries in Houston in the independent oil exploration and production industry,” says Lapsley. “Following the recent hurricanes, we expect the south-west of the US to be a very active area for us.”
Lapsley believes there are a number of other opportunities for Benfield Corporate Risk in its chosen speciality. “If you look at the developing part of the world, especially the former Soviet Union, China, India and Africa, the need for energy – oil and gas power – is growing significantly, and the marine industry is an important participant in moving commodities into these growing areas,” he says. “The complexity of these types of risks and the developing insurance environment creates an abundance of opportunities.”
If Benfield Corporate Risk wanted to expand geographically, it would be able to do so very easily. Because Benfield is a well-established and well-known broker, it is adept at getting licences to do business in countries around the world. “We’ve found in the past few months that Benfield is able to move very quickly in securing any necessary licensing in virtually any geography we have in mind,” he says.
Despite the potential to spread its wings, however, Benfield Corporate Risk is keen to ensure it does not over-stretch itself. Lapsley is conscious of the fact that his firm is still young, and should not try to do too much too soon.
“We have lots of ideas of where we would like to go, but we want to concentrate on our current business plan first. Our vision is that our customers will tell us where we need to be and how to serve them,” he says. “We are going to be very disciplined in making sure we don’t go into any new business areas unless we can be the service provider of choice.”
This does not mean that the company will turn a blind eye to a good chance to make money. “If opportunities arise in other areas, we will consider them if we think we can provide value to the customers,” says Lapsley. “Never say never, and never say always.”
