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Alan Jay Kaufman is chairman, president and CEO of H.W. Kaufman Financial Group, the Farmington Hills, Michigan-based parent company of wholesaler and underwriting manager Burns & Wilcox Ltd. and other surplus lines and specialty firms. One of the largest intermediaries in the U.S. excess and surplus lines market, privately held Kaufman has grown organically and through acquisitions over the past several years. Mr. Kaufman recently spoke with Business Insurance Editor Gavin Souter about the outlook for the market and what actions the insurance sector needs to take to solve the ongoing problem of attracting talent. Edited excerpts follow.
Q: What’s the outlook for the market?
A: I think pricing is going to stay as is, and if the market is flat, that will be good. We haven’t seen a lot of decline, but we certainly haven’t seen an uptick in all areas, and my prediction is that through the end of 2018 the rates will stay as they are, and in some cases they may even go down.
Q: What effect does this sustained low-rate environment have on the market?
A: The strong will survive, and the weak will not be able to weather the storm because the margins are becoming thinner. Last year, people were hoping that it would remain flat, but it really didn’t — we’ve seen declines this year. Some retail and wholesale brokers will have to throw in the towel because the cost of debt service or the cost of operation can’t be supported. That’s one of the reasons why we’ve had an increased amount of acquisitions.
Q: You’ve been involved in some acquisitions recently; what differences have the deals made?
A: The acquisitions brought great talent on all dimensions. They brought expertise that we can continue to build on, they brought youth in many cases, and that’s the most important thing for us. The actual book of business and relationships with retail brokers are great, but the talent is the most important thing. The first thing we look at is the talent base. We’re a private company, so we are thinking long term.
Q: There’s a lot of private equity money in the industry. Could you see a time when you’d be looking for your firm to be acquired?
A: No. We’ve never used private equity money. All the acquisitions that we’ve made have been internally financed, so we are very capable of expanding through the smallest acquisitions to the largest acquisitions. There’s no reason for us to use private equity or other sources. We’ve been relatively conservative and prudent in our acquisition activities, and more of our growth comes from organic growth than from acquisitions. There are so many companies competing for acquisitions, driving up the multiples, that we’ve passed on some acquisitions.
Q: Are you looking to expand your international operations?
A: Yes. There’s a lot of talent in the London market, and we are always looking at teams of people or other opportunities, whether it be in London or outside the U.K. We do business in 65 countries, so we are looking to expand our reach and expand our talent.
Q: Cyber has been a growth area for several years, but in what other areas do you see opportunities for growth?
A: It’s not a new area, but allied medical is a large area for us and for the industry. Health care and related fields is a strong area in the United States, particularly with the aging population. Another area where we want to grow is construction. With both our binding capabilities, our reach in London and other places of the world, and of course our brokerage, we compete handsomely, and we think that area will continue to grow. I think the government is way behind on infrastructure in the United States, and there will be a significant amount put into construction, so it will be a good area for us and for our industry.
Q: In terms of the wholesale market, it’s changed quite a lot over the past dozen years with large retailers divesting wholesalers. Do you see other significant changes?
A: The conflict of dealing on one side of the table as a retailer and the other side of the table as a wholesaler still exists, so I think there will be more divestiture. I also think from a business perspective there will be more divestiture because for some retailers that own wholesalers, the wholesale operation is not producing the results; and with the headaches of the conflicts, they may decide to sell their specialty wholesale operations. We are looking closely at that as opportunities for us.
Q: Given the need for new talent, what do you think companies can do to attract talent?
A: The average age in our industry is about 54 years, and when we looked at that happening in our company, we made a concerted attempt to change that. So the average at our company now is 40, and we’re still concerned. Talent to me is the No. 1 issue facing the insurance industry, and the industry has not done enough about it — the industry complains about it, they recognize that it’s an issue, but they haven’t done enough about it.
The top universities and the best business schools, for the most part, do not have insurance offered in the schools, so a student graduating from that university has never been exposed to insurance, and consequently the student is likely not going to have an interest in interviewing with insurance companies or insurance brokers. The opportunities for students to be educated at insurance industry companies is limited, which is one of the reasons a number of years ago we started the Kaufman Institute, because we thought it would be a competitive advantage for us, and it has been.
Also, my wife and I endowed a professorship in insurance at Michigan State University, where the business school did not have an insurance class. This fall there will be three classes taught, and that will change the future. That’s only a starting point, but until universities have the wherewithal to have insurance classes, you won’t have a flood of students knocking on the doors. The insurance industry must recognize that’s one way to do it. It can’t just be by talk, it has to be by action, and that means putting money on the table.
Art Lynch became CEO of Downers Grove, Illinois-based Coventry Workers’ Comp Services, a unit of Aetna Inc., in November 2013 and is responsible for Coventry’s overall revenue, operations, networks, pharmacy and care management products. He spoke to Business Insurance Deputy Editor Gloria Gonzalez about the opioid epidemic, return-to-work programs and how technology can help improve treatment outcomes for injured workers. Edited excerpts follow.