The Commercial Insurance Brokerage Business - Jonathan Crystal - e3

Hey, Michael here. You will now hear some episodes of the Michael Girdley Show that we had branded differently, called Unusual Profits or some such like that. Same show, same person, just me interviewing people and producing content that could be helpful on your journey and mine as well. So with no further ado, here's the episode. Hey, Michael here. Sponsor for today's show is actually a product that I'm a part of called DM Bridge. And what DMBridge is, uh, is a service that we built, uh, to solve the problem that Twitter's direct messaging functionality is a total mess. So we built DMBridge to help you fix that. Um, a lot of the other solutions, uh, do things like requiring you to install a whole nother inbox. We didn't want another inbox, so we created DMBridge. And what it does is it takes all of your Twitter DMs and has them appear inside of your email inbox. So you can reply to them just like it's a regular email. You see them just like it's a regular email. You can search them later like it's one of your regular emails, all just by using DMBridge. So, uh, we're currently live with the product. Uh, would love for you to sign up and become a customer, uh, and check it out. So you can find that at dmbridge.app, uh, and go on there, put in your name, uh, and be either part of the beta or join us as part of the live use of the product. And again, check it out, dmbridge.app. All right. Welcome to Industry Anonymous. We're recording today. Jonathan, good morning. How are you doing?

Hey, Michael. Nice to speak with you.

So thanks for making time with this. You know, this is a new podcast, right? And the idea is to talk to people about industries that people just don't, don't talk about very much. And you and I went to high school together and hadn't talked for 25 years and connected via Twitter. And then today we're having a chance to talk about insurance brokerages, which is something you've done for 25 years.

Absolutely. That's a fascinating world of insurance. No, I joined my family's business in 2000 and I wrapped up a 20-year career. And so ask me anything, I'll tell you the goods, the bads, the highs, and the lows.

Yeah. Well, before we talked, you said insurance was like the most boring industry. Did you say most boring industry you could think about, or it was close to that? I'm curious what Why do you think that? Because clearly there's a disconnect here because I am fascinated by it and you find it not so exciting.

Well, no, I think most people, you tell them you're in insurance, they either eyes glaze over or they run away thinking you're about to sell them life insurance. But it's been an incredibly interesting career because you get to encounter every type of business in every stage from startup to fast-growing on the precipice of bankruptcy, you get to deal with people at their best and also at their worst. And I remember when my son was 6 and I was taking him in the office one day and I said, "You know what I do for a living?" And he said, "Yeah, you're an insurance broker." I said, "Well, do you know what insurance is?" And he said, "Nope." And I said, "Well, imagine you've got a house. What could happen to your house that would damage your house? He said, a sandstorm? I said, well, yeah, that could happen. What else? He goes, a tsunami? I said, yeah, that could also happen. Well, like something else. He goes, a fire? I said, yes, a fire could definitely happen. And like, how would you have the money to replace your house? And we had a whole conversation about what the role of insurance was. And so I think insurance is a very fundamental to just about everything we do in life and business, but it's really about risk and how we think about protecting our lives and our families and our businesses. And so it is an important topic, but we all try not to think about it too much.

Yeah. So who, you know, as I think about, you know, insurance is the stuff you buy that pays you when something catastrophic happens. So you have, you minimize your risk of ruin. You know, as I think about the insurance industry, who are the different types of roles that you see there? So there's the brokers, the producers, reinsurers, who are all these different people? That are the cast of characters in this industry?

Yeah, I think there's— the best way to think about it is there's manufacturing distribution. So manufacturing are the insurance companies, and they're the big names that you're familiar with. They're the Zurichs, AIGs, Travelers. They're the Progressives, the Geicos. And generally speaking, they are carrying on their own balance sheets, to a large extent, the risk that they take. And so their manufacturing insurance policy that are sold to their end customers. The distribution side of the business are the agents and brokers, or the producers is another way to think about it. And their role is to go out there and source customers for manufacturing and match them with the right product or the right product structure. I think if you think of it those two ways, there's a little bit of complexity within there, but that's probably the easiest way to think about it.

Yeah. So if I'm walking up and I'm buying life insurance, for example, that's the simplest, I guess, easiest easiest, most basic life insurance. So, you know, I'll pay $100 in premium for some, some benefit. You know, if as I pay that $100 a month in premium for that benefit, how do I break down where that money goes of the $100, right? So a certain amount goes to the producer, and then, and then eventually I've, I mean, I've done the math, right, and figured out, okay, what are the odds of me dying this year? And like, there's a significant markup all the way down the insurance business where, you know, I might be paying 1% of the benefit per year or half percent of the benefit per year, but the chance of me dying at 35 is 0.01%, very, very low. So how should I— how do you think about like the $100, out of that $100, kind of how does the value chain work its way all the way back up to the manufacturer?

Yeah, well, I guess there's— you started with the right place, which is like, what's the risk? And the whole concept of insurance is around risk pooling that, you know, the chances of something happening to you on average are quite low, but if it happens to you, then that can be really catastrophic to you. So by spreading risk across a bigger pool, then everybody benefits from that. So the actual risk is the, like you said, that the 0.5% or the 1% or depends on the line of insurance, the actual percentage of likelihood of there being a claim and the severity and averaging that over a pool of there. So it depends on the line of insurance. So insurance brokers and agents sell different lines of insurance and they get paid differently based on the line of insurance, but also kind of thinking as kind of for what they do and kind of all that's in it. So like health insurance is typically sold to corporations, like big policies, you think a group medical and those kind of coverages. And it might be a relatively small percentage of the premium, maybe 3% or so goes from the carrier to the broker or the agent who's put that in place. On a typical property and casualty policy, whether it's commercial or whether it's like home and auto, the insurance company will pay their distribution somewhere on the order of 15% is probably a good number. So for every $100 in premium, might be $15 that goes each and every year to the producer on that business. Life insurance is a little different because it's kind of a one-time sale. And the way the incentives have been structured is generally life insurance agents get a huge upfront commission and a very small trailer down the line. So it can be 100% of the first year's premium. In some states, it can even be over 100%. So it might be $100 or even $125 if the first year, $100 in premium, but then they get a very small de minimis compensation from that. I was specific in saying it's the carriers, the insurance companies that pay their producers, that pay their brokers. It's not you as a consumer, you as the business who pays that. I remember having a conversation with a client once about that. He said, "Well, I can't believe I'm paying you this much to be my broker." And I said, "Well, you're not paying me. The insurance company is." And he said, "Well, what does that mean? What if I don't want them to pay you that much?" I said, "Well, here's the thing. If you don't like me getting that, think about how much value you're getting from the relationship. How much work am I doing for you?" In that case, In that particular situation, his prior broker had reduced his premiums by about 25% and gotten him better coverage in the conversation and helping him find his way to a better, more appropriate insurance company. I said, "Think of it this way, you were paying your prior agent 25% more to do effectively a less valuable job for you." So it was a funny conversation in that there might've been some cursing along the way there. I will say there's one thing to be aware of that I think is a little bit inside baseball, but most states have very strong regulations for something called rebating, which is returning commission to customers. So there are laws in place and regulations in place that inhibit or prohibit brokers and agents from sharing commissions with anybody who's not licensed and specifically with their customers.

Interesting. Yeah. So why do those laws make sense? Besides protecting the insurers? I can see why the insurers don't want it.

I have no idea. I think that's an artifact of another world. And I think that's something that probably might change. There are some abusive— there are a lot of abusive situations out there that you can imagine where people start returning monies. But yes, I think that is designed to protect the industry from its own self rather than consumer-friendly.

Yeah. I mean, I think there's always a temptation in insurance brokerage. One time my father-in-law— I don't, I didn't, I haven't told you this. My father-in-law was a longtime insurance broker, mostly, you know, family property casualty, all that kind of stuff in Ohio. And, you know, young me, when I was just dating his daughter, asked him, why is insurance legal, but gambling is illegal? And, uh, he got really mad at me. There is a correct answer to this. He didn't give it to me, but one is existing risk and the other one is creating risk. So I totally, totally understood that, but I do think it kind of hearkens back, probably my guess would be to an older time when insurance was still trying to get out of kind of the huckster era of its evolution. You know, early on, you look at some of those old advertisements for insurance and it does not look super above board.

No, it's kind of an industry that has, What we do in the industry is really important. You know, coming back to it, it's like helping people through their most difficult times. You're in Texas. There are millions of Texans right now who are dealing with pipe bursts. There are businesses that have lost revenue because their, their stores or operations have been closed. There are— there's going to be the consequences of this winter storm are going to be as bad as probably close to Hurricane Harvey. Maybe the worst situation Texas has faced in a long time. So what we do is important. Insurance is actually critically important to protect people. Most people cannot afford to lose their house, cannot afford to lose their income, uh, cannot afford to lose, uh, maybe their car or to be sued. These are important situations, but the, the reality is that the industry has not helped itself by kind of professionalizing and really educating consumers about the role that they're in. And it's tricky. It's a product that people don't want to think about. It's called— they call it kind of a low engagement product, you know, that people don't want to have to think about it, don't want to have to buy it. They kind of want to outsource the decision to somebody else. And oftentimes that's why they have an insurance broker or agent, somebody they trust who's going to be out there getting them hopefully the best product and the best pricing. Whether that's the case or not is often dependent on the quality of the person they're working with.

Preston Pysh Yeah. So if you think about kind of the direct-to-consumer, direct-to-small-business insurance markets, so there's the vertically integrated ones that are soup to nuts, like the Progressives of the world and the Geicos of the world. So that's one model. And then you have the independent agents who have the freedom. I guess some of them have the freedom to choose from which carrier they buy from, and others are locked into a single one. Is that kind of the three? The 3 types of models that are out there for insurance brokerages?

Yeah, that's a good job. So there's what they call captive agents. So they may be like a Nationwide or they may be an Allstate or State Farm. That's all they sell are their products. And so they have sort of a different, slightly different, you know, model. Their role is an agent is they are agents of the insurance company. They owe their duty and responsibility to the insurance company, not to their customer. Right. An independent agent, or broker, and sometimes they're used independently, is accountable to the customer, and they work with multiple and different insurance companies. Often, you know, could be a handful, it could be dozens, it could be hundreds. It depends on the size of the firm. That's probably one thing to think about in kind of understanding this world is like, it's not a world where every agent, even an independent agent, works with every insurance company, right? They have a usually a sort of a a number of preferred insurance companies they work with that can match the type of clientele they work with. And so they may not have direct access to the insurance company that might be the best fit for a specific customer. And so maybe that's one question to ask when thinking about working with an insurance agent is, "What's your expertise? Who do you work with? A business like mine? You work with people that look like me in terms of where my home is or where my business is?" Because they're going to have specialized knowledge, but also access to specific insurance companies. That's called an appointment. To be appointed with an insurance company means you're allowed to conduct business with them.

So the independent brokers, there's obviously some appeal to that from a customer standpoint, because you're not going to just be getting one quote from one group, whatever Nationwide wants to charge on it, et cetera. So how does the actual mechanism of you guys— let's say you're appointed with 10 different carriers and you're an independent broker, how does that actually happen? Is there an exchange, or do they have like web forms where you go and you upload standardized data for folks to get a quote and then you say, okay, why? And then it gets spit back to you. Like, are they still having you fax stuff in? Like, hopefully it doesn't look like that.

Uh, it's not fax, but it's closer to fax than it is seamlessly at an exchange level. It's, it's still, uh, you know, I described it a little bit as, uh, you know, knocking rocks together. Uh, there are, you know, web-based interfaces and there are some industry standards around data. Where you can sort of feed information into like quoting engines. That's what they call them, where they can get, you know, pricing from multiple different insurance companies. But, you know, that's great when you're sort of standard and you fit in a box. Anytime you sort of don't fit in a box and you've got a fireworks business, so you do not fit in a box, right? Then, then you sort of have to figure out, um, who to go to. So, you know, it's interesting. I would say if you want to understand behavior, understand their incentives. Oftentimes with insurance agents, like it's the, you know, what's the easiest, they'll go to the insurance companies that have sort of the easiest to use, you know, easiest, quickest, you know, responses to quotes, you know, ideally the best pricing, but depending on the circumstances, that may not be the most, you know, the major driver there. And, you know, complexity of risk. So if something is, you know, a large premium, right, then there's a large commission associated with that or a larger commission associated with that. And so you're sort of motivated to go out to a wider range of insurance companies. And this idea of being competitive, right? So the producer, the actual person who is working with the client, probably has a sense of what do they need to do to win the business? Is it have better price or to solve a particular problem, or did the customer have a bad experience with their prior agent, with their prior claim, and trying to figure out what the right need is to match there. And then on that basis, if it's really just about price, then they may go to a large number of insurance companies to make sure they've got the best price. Uh, if it's about quality of coverage or brand or other things, they might go to a handful. Generally speaking, they're going to go to, you know, 3 to 5 as a way of, of, um, you know, showing a range of options to the customer and that they've done some diligence in sourcing options for them.

Yeah. Well, and it seems like being in the selling business-to-business insurance, that's got to be a much better business than selling Aunt Betty life insurance. And I don't mean to pick on the Aunt Bettys of the world, but of the people that I know that are in the commercial insurance brokerage business, they just seem to be doing better. That's my question. Michael Gayed Yeah.

I mean, I would say, look, insurance brokerage is probably the purest form of sales out there. I used to say to our producers, you're selling trust. And yourself. Your customer's buying a complex product that they generally don't understand, they don't necessarily want to understand, that they hope never to use. So really, when they're choosing you to work with, they're trusting that you're going to be there for them and you've done the right thing for them at the worst possible time in their life, when they've been sued, when they've lost an asset or something like that. So that When you're selling trust, it tends to be an industry that attracts really good salespeople and compensates them well for doing that. And to your point about commercial lines is a great place to be, it's because it's the bigger tickets, right? So if the commission rates are about the same regardless of size, well, you might as well sell a bigger ticket because then you're going to make a bigger commission on it. But I think also, I looked at it differently when I was in the business. Your opportunities for creativity to add value are very much greater with more complex businesses and businesses with real problems and where you could really get in and understand them. I love working with growing businesses or businesses that were cracking into new industries and helping them understand what their risk profile is. I think the best brokers are— they're almost somewhere between business psychologists and consultants and investment bankers. They're really digging deep into your business, understanding what the financial drivers are, how much risk can you take, what's your cost structure look like, what are your problems, how can they be there to solve them, and how can they anticipate the worst possible things that are going to happen and look around the corner for you. I think the best people in the industry do that. They do that with a lot of acumen in terms of understanding, and then also just that psychology side, like what's motivating people. Often larger businesses, there might be multiple stakeholders, there might be CFO involved, there may be a CEO involved, there might even be a dedicated person related to insurance. Working with all of those people to make sure their needs are met requires a level of sophistication that can attract pretty high-quality people, but it's also not for everybody as well.

Trey Lockerbie Yeah. Well, yeah, it sounds like it requires a level of sophistication and there's a lot of— You can just see the Venn diagram going down of people capable of doing that kind of stuff. Yeah. So, you know, one thing that a lot of people I'm connected to on social media and stuff are doing is entrepreneurship through acquisition. Curious about how you think about insurance as a place like that. It seems like, you know, my father-in-law sold his insurance brokerage. Seems like it's been discovered by people rolling them up and giants owning brokerages. And he actually sold his back to Wells Fargo. You know, what's your perspective on that kind of opportunity for people? Is there Is there room for Joe, whoever, to go search for an independent brokerage and use that as a launching pad for them to get into the business and not spend 20 years building up a book and that sort of thing, or has it been discovered?

So there's a few things you said there. One, which is the financialization of insurance, the insurance industry, and there's larger companies that are rolling up and acquiring agencies. They're using a lot of leverage to drive that. It's a super successful model, and that's going to continue to play out. I think on the other side of the coin though is there's always room for new independent producers to come out and to— It's kind of a low barrier to entry business. You get your license, you can work on getting some appointments or work with an intermediary that can help you get appointments, and you can pretty much set up shop with very little capital and very little work to get it. You just got to get customers and you can build from there. I think the interesting opportunity right now if I were in my 20s or early 30s and sort of thinking about building up a business, which is kind of what you're talking about here, is I might say, well, gee, this is an industry that seems like it's got a PMS problem, right? Pale, male, and stale. And you look around, there's a lot of old white dudes that are kind of running these agencies. That's not the future of the world, right? So how to How do youth leveraging technology, leveraging relationships, and either look to acquire agencies from those older producers or be a succession plan, or to pivot and deploy new technologies to build 21st-century agencies? I think there's a lot of opportunity out there. I think there's a lot of communities that are underserved by the insurance industry, and really there's a huge amount of opportunity to As my dad would say, everybody needs insurance. Most of them need it multiple times a year. So everybody you talk to is a potential customer. So I might start, if I were an early-stage entrepreneur, and just think about what's the natural network I have, what's the community that I work with, how could I be seen as a trusted advisor in that community, how could I develop capability that would be different from the opportunities there, and then how to think about technology in a way that's going to be supportive of the business and not there. I think most people in the insurance industry see the role of the individual producer being around for a long, long time, but a lot of innovation around kind of how that works. You look at like real estate industry, or you look at mortgage broking, you look at other industries where there's been a lot of of innovation around the product side, but at the end of the day, someone needs to be out there selling and holding people's hands and helping them understand what they—

Yeah. Well, at the complexity end, for sure, right? And I think it comes back to that thing you said, which really struck me, like you're selling trust, right? And that to me smells like an industry that will be hand-to-hand combat for a long time.

Yeah. At the kind of mid-market and larger size of corporations and sophisticated clients. But there's a lot of really interesting innovation going on on the product side.

If I were—

like, you launched Coffee Shop recently, right? So if I owned a coffee shop in Texas, I would look closely at Three, which is a new product by Berkshire Hathaway, which is like a 3-page insurance policy that covers really soup to nuts every insurance coverage you would need in a very simple way.

We had a hard time finding an agent, by the way, to sell us like a liability, like a $400 liability policy, which I understand. In my question, I'm explaining why, why it was hard to find somebody who could actually write a complete sentence. Like, yeah, the emails we would get were like unbelievable.

Like, because they're like going to get $50 off that. Yeah, yeah, it's not worth their, not worth their time. Um, so that's, that's a little bit there. So like 3 is an interesting option for their Even on the life insurance and risk side, there's a new product called Day Forward, which is an income protection policy that just came out in Texas. Brella is a new supplemental health insurance. These are all innovations on the product side that are starting to develop that I think are worth keeping an eye on because there's going to be opportunities that'll be disruptive, but there are going to be opportunities to sell differently and think differently and advise differently. Yeah.

I have to ask a crypto utopian question. There is this blockchain peer-to-peer insurance kind of vision that some people have. What's your opinion on that kind of stuff?

I've spent a lot of time thinking about blockchain-related technologies and their applications to insurance. I think they're a long ways off for the type of risk sharing you're talking about, because somebody at the end of the day needs to be at the balance sheet when there's an earthquake or when there's a big winter storm or hailstorm. So at the end of the day, who holds the risk on the balance sheet is a tricky question to ask. It's not just peer-to-peer. Peer-to-peer lending, the maximum you lose is the money that you lend out. Peer-to-peer insurance means, shoot, I get a premium, but I can lay out more than I laid out. That doesn't really work. Where I do think there are interesting applications for blockchain technologies is around taking the duration of insurance policies down from Think of it as like right now, they're a year, maybe 6 months for auto insurance, but you can imagine it going down to by the day, by the hour, even by the transaction. And so as you get down to these sort of microtransaction-related insurances, and there's a lot of work around that in the technology space that you can imagine where smart contracts can be used to apply to different policies. I invest in a company called TrustLayer, that uses facilitating automated verification of certificates of insurance. I think if you've ever been in a business where you've either had to issue certificates of insurance, or you've seen them if you're a contractor, you're a builder, own real estate, those kind of tech— you're like, "What is this PDF that I have to show to somebody or this piece of paper that shows that I have insurance?" That's an area where I think blockchain technologies will come to play, which is this How do I know that you, Michael, have insurance when you're coming onto my premises or you're a contractor? How do I know that it's enforced? Right now, people are relying on a piece of paper or a PDF and there's nothing to assure that. So I think there's definitely applications of those technologies. The type of long-term applications are gonna come maybe when you and I are old and, you know—

Older. Older.

Older. I've been corrected by my youngest that I'm middle-aged now. But yeah, we— it is an opportunity around, you know, this idea of assurance that something happened.

Yeah.

And there's opportunities to really reduce the costs, like around like cargo insurance, like where things happened and when they happened, or around even around like product contamination, like who's responsible for it. So there are applications being developed.

I don't think we'll see them in our day-to-day For some period of time.

Yeah.

Well, I mean, we're running out of time, but I do think in reflecting on the last kind of 30 or so minutes, like we started with this idea that insurance is pretty boring. Like I was super entertained. Maybe we found the one person in the world who's like, oh man, that's super interesting that there's the different types of insurance brokerage and M&A opportunities and stuff. So thank you.

I've made, you know, I've got Michael Girdley to geek out on insurance. So my, my, I'm going to go home, call it a day, and say it's not going to get better from here.

It's all downhill from here.

All downhill.

Super cool. Well, I mean, what's, what's so cool also, and I don't think I really understood this as an early 20-something Cub employee, is just how much knowledge around a space, being in it for 25 years, gets you, right? And you can hear just in how you're talking about it and your feel for the industry and the different types of players in it. Like, that's, man, that's just, that's just cool. Like, it's so valuable and so, so unique.

Thank you so much. I really appreciate it. It's been a pleasure. Thank you, Michael, for inviting me to participate, and, uh, good luck with podcast. I look forward to subscribing and, and, uh, you know, seeing how it goes.

Yeah, man, thanks a bunch.