Handle with care

Your heart sinks as the phone rings. Caller ID flashes up and yes, you guessed right: it’s that client again. He won’t listen to reason, he won’t get off the phone, and when it comes to renewal time, he squeezes you so tight that you end up losing money. Broker, beware: you’ve got a toxic client on your hands.

This poisonous breed has been around for as long as broking itself. There’s always a canny chancer looking to get the best deal at the expense of their professional adviser. In the past, perhaps, it hasn’t been too much of a problem. But since the recession hit, brokers struggling to survive simply cannot afford to support clients who cost more than they bring in. So why do brokers accept these clients in the first place – and how can they break free?

“It’s a general trend at the moment, with the pressure on fees,” Biba chief executive Eric Galbraith says. “Unfortunately, and this is the reality of it, there are competitive pressures in the market where you do get reports of fees that do not seem to be able to engender a profit. That tends to be the reality of the market and I suppose that’s the advantage of a competitive market.

“It’s a challenge for everyone in business, never mind brokers. But in this climate, brokers in particular are going to come up against clients that are looking to cut costs, and everything comes under pressure.”

Armed and dangerous

Moreover, the advent of the internet has given these clients a new weapon. They will find the rock-bottom price online – and then demand that their broker beat it. As the fight for new business gets ever dirtier, insurers are dropping their prices for new business only to hike them at renewal, making it difficult for brokers to retain clients.

Take this example: independent broker Peter Smits of Ashbourne Insurance had been working for a local tradesman for a number of years. In the past three, the client had begun to threaten to take business elsewhere, contacting other brokers in the process and asking for alternative quotes.

Smits explains: “The situation came to a head in 2008 when he became extremely elusive and vague at renewal, finally contacting us to demand to know what commission we were paid and then proceeding to try to negotiate this down.

“Knowing how much work it took to manage the client and their policy, I was reluctant to do more for less money, and he eventually provided an alternative broker with a letter of authority transferring the business from our brokerage to theirs, presumably for a reduced commission. Since we lost the business, the client has been known to call us and ask for help and advice, to which we have very politely declined.”

In the context of personal lines, Smits says examples of toxic clients range from those that will grumble about renewal or instalment fees to those that constantly compare brokers’ prices with aggregator sites without considering the product.

So what to do? First, you need to identify the toxic client. They recognise the value of the broker but don’t want to pay for it. They always know better and will say things like: “I’ve been online and can get it cheaper”, “my mate down the pub says …” or “insurance is just one big con”. And they are not the type of clients that are interested in loyalty or building relationships with brokers.

Moreover, these clients will sometimes be late payers, effectively using their broker as a bank. “Don’t allow them to use you as a line of credit. They can have the bottom-dollar price but only if they pay in full prior to effecting cover,” warns one broker who has had a bad experience.

So that’s what a toxic client looks like – but where do they come from? “From all over the place,” Smits says. “They will have flitted from insurer to insurer, broker to broker, as they chew them up and then spit them out.”

Smits points out that the recession has highlighted the real drain on resources that toxic clients create, with many still expecting a ‘Harrods’ experience at an ‘Aldi’ price.

No pain, no gain?

Given all the headaches these clients entail, why do brokers get involved with them in the first place? According to Bluefin chief executive Stuart Reid, some brokers have begun writing business for zero commission in the hope that it will pay off in later years.

“We lost a case in the recent past to a broker that did it for nil commission, and it makes you wonder what on earth they were doing. But in speaking to that broker, he said that when the market turns and things get better, he’ll be able to make a return then,” Reid says.

“There are also times when some of the big brokers will win a big trophy account at cost because that trophy itself gives them the ability to go to other businesses and say ‘we do this big case, can we do your big case?’”

Swinton chief executive Peter Halpin agrees that some clients will not become valuable for brokers until they’ve been on their books for a number of years. “If brokers aren’t making money out of customers in year one, they are hoping that they may be able to recover some lost income in year two or even year three. It really depends on what level of investment they are prepared to make in order to attract the new business.

“I guess there is an approach that some brokers may take, which is to offer high levels of discount in order to attract customers. But then there may be customers that are just generally difficult because of their tendency to default on credit terms or to cancel policies.”

Best of both worlds

So how does a broker tackle a client that wants an online deal but a broker’s advice? Halpin – whose Swinton operates a ‘bricks and clicks’ model, a mixture of online and branch broking – thinks he has the perfect solution. “What we try to do in the offline world is make sure that a customer is comparing like for like in terms of excesses and product coverage,” he explains. “Often when customers feel as though they have found a good deal elsewhere online, they may not be fully aware of some of the product features and benefits available, which we can explain to them.

“So quite often we are still able to convert customers who may have got a quote online when we have the opportunity to have a conversation with them, and explain what we can offer to them and take them through the product they are buying.”

According to one senior manager at a national broker, no business can escape the pitfalls of toxic clients. But he thinks the recession has shifted clients’ focus on to the value that brokers offer, and if brokers don’t look closely at their earnings, the surge of toxic clients will continue.

“I think brokers have to start being better at selling the value that they bring to the clients or they have to start looking at different types of remuneration models,” he says. “Rather than a fixed fee or fixed commission, they need to look

at a success fee perhaps. They also have to be better at pinpointing exactly what they are doing for the client and what the right fee is for doing that role. Unless brokers start actually getting their value proposition right, the spiral of toxic clients will increase.”

Cleaning up toxic clients will not happen overnight. As Reid concludes: “There will always be lines of business within brokers that are less profitable than others, but it is up to those businesses to increase their profitability. That can be by negotiating higher commission levels, and by making the process very slick and therefore not very costly. But in a profitable, well-run business, it is your job to ensure what you write makes profit.” So remember brokers: handle with care. IT

Toxic clients in the corporate world

Large corporate toxic clients can be even worse than those in personal lines. They have the buying power to demand beauty parades, where they line rival brokers up against one another and use the competition to push down the price to unsustainable levels. The tendering process can be time consuming and costly – and only one broker will win.

“The big corporates form a very vicious market and brokers are being squeezed all the time on their fees,” the chief executive of one City broker says. “You have to make calculated business decisions at that stage. You have to take each one on its own merits.”

Five tips for managing toxic clients:

1 Don’t lower the value of your product or service to an unprofitable level

2 Be wary of clients that have regularly switched broker

3 Stay closer to clients that want to build relationship and rapport

4 Cross-sell other products to loss-making clients

5 Set up a scheme for your non-profitable business