Folgate aims to handle £1.1bn of premium by the end of its first three years and has been gobbling up brokers at more than one a month. Executive chairman Peter Cullum tells Jason Woolfe the strategy for winning in the broking game

All brokers know it is easier to make money out of an existing client than to win a new one. So Folgate is shaping its business philosophy around long-term relationships with its customers and making the most out of their business.

Why?

Because it pays.

"Retaining existing customers is more important than winning new customers," says Folgate executive chairman Peter Cullum.

That's not new. But Cullum has scientific proof rather than relying on anectdotal evidence.

Business guru Tom Peters, in his book Thriving On Chaos, wrote that for service firms, the cost of acquiring new clients is typically five times higher than the cost of the effort required to retain an existing client.

Business author Frederick Reichheld even calculates the possible benefit for insurance brokers in his book The Loyalty Effect.

He concludes that a 5% reduction in client defections can deliver up to 50% more profit.

Cullum notes: "Other people may be doing this intuitively, but we want to make it part of the business process."

This philosophy was behind a recent decision to change the focus of work at Riskline, Folgate's sub-brand for looking after SME business. Rather than concentrate on winning new clients, it is now aimed at gaining new business from existing clients.

Internet buying
Cullum expects a loss in the first year of business, rising sharply into profit for year two and then increasing more gradually towards a peak after more than five years (see graph).

Cullum predicts continuing growth in internet buying, and says that putting the emphasis on achieving long-term relationships will bring benefits to stand Folgate in good stead.

The crucial factor in making a brand successful at selling over the web, he says, is trust.

"Sadly, in our industry, we haven't been very good at creating trust.

"We've spent billions on technology but are probably delivering a service not far different from the early 1980s."

In Folgate's experience, longer-term customers are cheaper to service. Assuming a customer costs £78 to service in the first year, then in the second year this falls to £31.50 and only £22 in the third year, as the time spent on general administration falls steadily.

Shopping around
As trust grows, the thinking goes, Folgate's customers will become less price-sensitive. They will consider the value they get from the service to be greater than the saving they would make from shopping around for the cheapest deal.

To further the end of high quality service, Folgate is creating its own bespoke management training programme, tailored to the company's own staff training needs.

Cullum wants to have a wave of highly trained young managers waiting in the wings, ready for a planned "second curve of growth" in five years' time.

The programme will be run in conjunction with the Cass City of London Business School, part of the City University. It will take two to three years to complete and is envisaged as a "significant investment" both for Folgate and prospective students.

A year's planning has been put into the concept with the aim of creating a key insurance management qualification.

After its introduction, the programme could be available for adaptation to a wider audience.

The programme was a direct response to what he sees as insurance's failure to attract the brightest and most capable business people.

"I feel our industry standards have dropped," Cullum says.

"We have failed as an industry generally to attract the right level of graduates. It's been perceived as quite `unsexy'."

He is not the first commentator to bemoan the insurance industry's lacklustre image among potential recruits.

Many of the industry's largest and most successful businesses draw much, if not most, of their top talent from outside the industry. A straw poll of Royal & SunAlliance, Aviva and Willis reveals less than a third of their top people have insurance backgrounds.

He concludes: "Having a PhD in life is still more important than an MBA, but it's part of the mix."

But he also emphasises the relationship between the broker and its insurers.

Making money
One of Cullum's favourite anecdotes is that, in the mayhem that swept the insurance industry following the World Trade Centre attacks, Folgate didn't lose any capacity from its risk carriers and none of its binders was cancelled.

"The binders were making money," he says. "I'm certain that if they weren't, we would have had our binders chopped."

Cullum says there are four key factors for an acquisition:

  • The quality of the staff ("95% of the purchase price is goodwill. What's goodwill? It's the people.")

  • The underwriting results achieved by the business the broker produces

  • Its mix of business

  • Its profitability, as distinct from underwriting results. He's looking for at least 15% return on brokerage, and says: "Any less than 15% and you have to seriously question the management."