Straight from high school, Stephen McCarthy started his career in the mailroom of a general insurer. He went on to found Bellrock Broking in 2007. In this Insurance Business TV interview, McCarthy shared his approach to negotiating with underwriters. He also discussed today’s insurance challenges, including how brokers need to combine new products, like cyber coverages, with their more traditional offerings.
Danny: Hello and welcome back to Insurance Business. I'm Danny Wood, news editor of Insurance Business Australia. Today we're joined by Stephen McCarthy, the managing director of Bellrock, which he founded in 2007. His firm has two offices, one in Sydney and one in Brisbane. We're going to talk about some current insurance challenges and how things have changed since Bellrock was founded about 15 years ago. Stephen is in Brisbane. Hi Stephen.
Stephen: How are you there, Danny. Pleased to meet you.
Danny: Very well. Now, you've been in the insurance world for about 40 years now. Can you just briefly tell us how did you actually get into it in the first place?
Stephen: 44 years. Actually, 1979, I entered the industry. I was straight from high school. I'm in my final year of school. I wrote to every insurance company, every finance company, bank wanting to get into a, you know, white collar career where I'd start at the bottom. And my dream at the time was to work my way to state manager by retirement age. And then a job offer came through my school at Lumley General Insurance Limited in 1979. And that's how I started in the industry as a mail boy. It was a cadet ship, but I started in the mail department at Lumley's.
Danny: So you ever do you ever consider anything else when you're in the mailroom thinking, what on earth am I doing here? Or was, do you set your sights on insurance?
Stephen: I liked it. Like I. I felt like I was fitting in. Um, it was at first a big culture shock from school into sort of a very bland sort of office of 1979 where the boss was an ex war man, you know, been the World War 2. Jack Hamlin, a legend. Um, and, and that took a bit of adjustment, but I felt like I'd chosen the right, um, industry. From what was going.
Danny: But let's we're jumping around a little here. But you've been in the business a long time there. Always insurance challenges. But what do you see is a big challenge for insurance brokers right now?
Stephen: Now, it is basically, I guess, dealing with. The constant new insurance products are coming into the market. Dovetailing them in with the existing old school products that were available, like, for example, cyber risk crime, you know, cyber crime, tying that in with professional indemnity policy and all of these. It's quite a legal process now and a lot of skill is required in evolving with those, with with those with those changes and understanding how to give full cover and full protection without overlapping and an expedient pricing.
Danny: It's probably a good time to ask you about when you founded Bellrcok back in 2007, because you talk about your point of difference and how you serve clients differently. And I'm just I've been wondering what you've been talking about brings in the whole issue of just brokers having to know so much about what they're selling. I mean, is that is that one of your points of difference that you guess try and bring that knowledge to the client and educate the client?
Stephen: Well, that's what I mean. When I set up my rock in 2007, my I was very passionate about our negotiation model, how we negotiate with underwriters. At that time, there was a trend in the industry where a lot of brokers were getting paid, overriding commission and possibly profit share on their portfolio. And so they were basically seeing all these brokers, every broker that were if they were a smaller broker, they were in a in a buying group. If they were a larger broker, they could do it themselves where they would they might have 20 mil of premium and they'd say, okay, we'll share that at $5 million each to four main underwriters, and in return we get higher commissions, but at ultimately cut away the competitiveness of the negotiation because you then go to another underwriter outside of that little club and they go, Well, we know there's going to be shot back to them. So that that created a less competitive environment. So it was all about setting up a business that was the underwriter that writes the business is the underwriter that deserves the business, not through other means. So that was pretty much the the model. And also when we negotiate, we would we would only go in as the appointed broker and they would say we'd, we'd choose one underwriter and so we will run with you. This is an overview of the terms we're seeking only at the time. And they say no would we then talk to the next underwriter. So they knew it wasn't a wasted wasted cost. And 80% of quotes that we obtained from underwriters were bound, which the normal average was probably 18%. So it was a it was a very strong and it was a good, very it was very effective and clients liked it as well.
Danny: Mhm. That whole issue of broker commissions seems to come up from time to time as something that's sometimes a little controversial. And some brokers still work pretty heavily on commissions, others don't. I mean, do you feel that it just depends what sort of industry you're in. Is it is it possible for brokers not to work on insurance commissions and just just completely or is that an unrealistic?
Stephen: I think that's unrealistic when you're talking about, for example, reinsurance programs, everybody's got to receive income for their for their efforts. And if everything's done on a fee basis, it's probably could be done. But I just do think the commission model does have a have a life left. I think it's it's it's a fairly accurate way of rewarding. It can be it can sort of go out of kilter on very large programs where where it's unfair and it's probably a fee is more appropriate. But I do think there is a life for commissions as long as they're openly known what they are and there's no hidden agendas and, you know, overriding or profit shares and that sort of thing.
Danny: Hmm. In the 44 years you've been doing business at Bellrock, what do you see as the the big changes you've had to make in that time?
Stephen: Oh, gee, when I started my first business in 1982, didn't even have a fax machine. And I remember a client saying, Can I send that to you by facsimile? And I said, What's that? You fast forward. Back then, everybody, everybody, everything was mail. Like the Mail Australia Post was. Yeah, we'd have a big box and the day would begin when you opened the mail. Um, you know, sending out policy documents. Very cumbersome, very expensive way to do business. Um, it's. Yeah, technology has just made the business operate so much more effectively and efficiently. Um, you know, people have changed like the typical people that you work with, whether it be employees, clients, it's a different world. You know, there's a lot of, um, you know, I think mental health I think I see you see a lot more of that now than you would 40 years ago. Maybe people just sort of brush it under the carpet back then. But yes, it's a different world we live in. Um, I'm certainly working through those changes is exciting and I certainly don't think I know it all just because I've been in the business for 44 years.
Danny: The one, I guess one big risk that I guess has come into focus a lot more in the last 6 or 7 years probably is climate risks and, and how, how we deal with those rising costs on flood premiums and and all sorts of insurance is associated with Napkats. I mean, do you have any thoughts on that? Is this is this something that we're just never going to be able to get on top of?
Stephen: No, I think it's I think we're slowly getting on top of it. I think I've got hope. I mean, we insure a lot of northern Australian property, you know, north of that 26th parallel and um, large shopping centres, large office buildings, you know, billions of dollars worth of assets in northern Australia. And they have really the property owners that we represent have really suffered, you know, sixfold rate increases from, from probably ten years ago. Um, I believe the, the, the. The traditional model has been insurers, reinsurers and insurers have gone northern Australia. This is a region. This is the premium income we're collecting from this region. This is the claims we're paying. It's a it's a it's an ugly picture. We're just broad brush, increasing rates, increasing deductibles, make getting out of the market altogether because we can't we can't work through these losses, whereas I believe they're the most obvious point is who are the ones making these losses? I believe that the smaller residential properties, the residential property and smaller commercial properties, older buildings like old sugar mills, what have you, they're the ones that cop it in these big cyclones and these big weather events, whereas the large office buildings and the large shopping centres that are well maintained and I've got all the cyclone sort of proof roofs, they generally are not having the big losses. And whereas there's been a big broad brush rate that applied, for example, anything in northern Australia is a minimum cap rate of 0.2%. And, and I think with the new Federal Government, Northern Australia Fund that is focusing on that residential, small commercial strata asset classes, I think they will pick up the majority of the of the large weather event claims going forward. And I think the underwriters that are continuing to participate in that market that are not picking up those losses will realize that there is a the they'll they'll think they'll delineate between the more quality risks in those regions and possibly a more competitive market will emerge.
Danny: Okay. Well, that's interesting. So this is the cyclone insurance pool that that's going to take on the bigger risks and the rest will adjust in some way.
Stephen: So then we'll take the smaller risks. The smaller risks model, in my view, they will take they will they will incur their losses. The greater value of losses based on value of insured asset. And I think the underwriters that are outsource all of that reinsurance to that pool will all of a sudden find an improved ratio on their Northern Australia book.
Danny: Can I ask you about flood covers too? I mean what do you see as the future there for a business in Lismore that gets flooded every year? Um, it's too, too expensive to have flood insurance right now. Are they going to get some relief from somewhere or the options for them, do you think?
Stephen: I mean, I just can't see it. They've got to risk proof the building. I mean, insurance ultimately is I mean, if the losses have got a high history and they are in a low flood prone area, flood is hard. You know, you've got insurers sort of charging a 10% rate for the for the value of cover. That's a 1 in 10 year loss. You know, a business cannot simply cannot afford that. Yeah. So it's a very difficult I don't think there's a there's a there's going to be um, the losses will continue in flood prone areas. Um, it's a difficult one I think. I think investment in flood proofing of property is probably where the money should be spent.
Danny: Stephen McCarthy It's been fun talking to you. Founder and director of Bellrock Broking. Thanks very much for your time.
Stephen: Alright. Thank you, Danny.