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Brokers should assess how buyouts will affect the way they service clients


When mid-market insurance brokers are acquired by larger competitors, maintaining the client relationships they've spent years developing demands an open dialogue between producers and insurance purchasers about their respective post-sale expectations.

U.S. and Canadian commercial insurance and employee benefits brokers announced 165 mergers or acquisitions in the first half of this year, the most active first half since 2008, according to Chicago-based Optis Partners L.L.C.

As consolidation in the brokerage industry is predicted to continue, experts say local and regional brokers' evaluation of a potential sale to a larger firm should focus on the sale's possible effects on the individualized service they provide to their clients.

In particular, experts say said midsize brokers should thoroughly consider how a potential change in ownership might affect the producers and staff members assigned to their key clients' accounts.

“From our point of view, the relationship between the individual producers and the client cannot change,” said Keith Wilcoxson, executive vice president of mergers at Gallagher Benefits Services Inc., the employee benefits brokerage and consulting arm of Itasca, Illinois-based Arthur J. Gallagher & Co.

Gallagher was the second-most active participant in broker mergers and acquisitions from 2011 through 2013, with 73 deals during the three-year span, according to Optis Partners.

“Whoever is servicing that client account, and however they were providing that service, that has to stay the same,” Mr. Wilcoxson said.

Because midsize brokers' and consultants' relationships with clients are often as personal as they are transactional, assurances of continuity following a merger or sale typically determine a client's decision whether to remain with their brokers.

“Clients want to know first and foremost what the acquisition means for their company and what it means for the producer handling their account,” said Andrew Forchelli, a Los Angeles-based senior executive vice president at Hub International Ltd., the most active acquirer in the 2011-2013 period.

Mr. Forchelli's former company, GNW-Evergreen Insurance Services Inc., was among 25 midsize brokers and consultants that Hub bought last year.

Seven months into the integration process, Mr. Forchelli credits well-prepared client communications about changes under its new ownership for the company's high rate of retention of former GNW-Evergreen clients.

“All of the producers were briefed about the deal in advance of the formal announcement, and we had an outreach initiative that first and foremost was aimed at reaching our key clients and centers of influence,” Mr. Forchelli said.

Beyond the immediate continuity of existing services and personnel, experts say clients would be well-served to inquire about the possibility of any future changes to their brokers' service and compensation models.

For example, an acquiring firm may plan to consolidate operations, which experts say typically negatively affects the quantity and quality of smaller clients' face time with their broker.

“There may be a centralization of certain things down the road that might mean a reduction in local services,” said Timothy J. Cunningham, Chicago-based managing partner at Optis Partners. “The probability of something like that happening on a larger middle-market account is pretty small, though.”

Mr. Cunningham said clients should ask their brokers whether there are plans to change their compensation or fee structures under the new ownership.

“The regional broker previously was likely providing a certain amount of loss control or related service as part of their regular commission or fee structure.” Mr. Cunningham said. “Going forward, they might find that the new owners allocate value-added services in relation to the size and/or profitability of the account and may plan to begin charging for some of those services above a certain threshold.”

On the other hand, merging with a larger brokerage allows midsize brokers to offer expanded value-added services — including data analytics, claims management and loss- control services — as well improving leverage with insurers or reducing brokerage fees and other expenses.

“A client should never have to ask those questions if the merging companies are doing their jobs,” said Phil Trem, vice president of mergers and acquisitions at Willoughby, Ohio-based Marsh, Berry & Co. Inc.

“They should be answered for clients on a proactive basis.”