Surplus Lines Brokers Caught In TheCrossfire
Wholesalers, MGAs distinguish rolefrom retailers; saying they cant steer clients

The fallout from the insurance industrys contingency fee scandalappears to be pointing toward stronger disclosure regulations forretail producers, but what changes may come for wholesalers appearsambiguous at best.

Officially, the two major surplus lines groupsthe AmericanAssociation of Managing General Agents and the National Associationof Professional Surplus Lines Offices, Ltd.both want to seewholesale brokers exempt from disclosure notifications to theconsumer.

Their reasoning, according to Richard Polizzi, president of theKansas City, Mo.-based NAPSLO, is that wholesalers do not dobusiness directly with ultimate policyholder.

“The retail producer deals with the client. We dont,” said Mr.Polizzi. “Often the client doesnt know we are a party to thetransaction. Once we release a quote, we have no influence over thedecision-making process. When we have come up with the terms of therequest, we sit and wait.”

At the moment, the National Association of InsuranceCommissionersheadquartered not far from NAPSLO in KansasCityappears to be leaning toward recommending that wholesalers beexempt from disclosure regulations. However, that does not meanwhen it comes to the issue of compensation for wholesalers it willbe business as usual. This is not to say there are rumblings forreform, but simply it is hard to predict what the future might holdin this volatile political climate, industry players concede.

Anything could happen, said Mr. Polizzi. Dusting off my crystalball, from what I see so far, regulators are finding this to be adifficult issue to get their arms around.

Its a darn good question, said Ronnie Moore, a past-president ofKing of Prussia, Pa.-based AAMGA, when asked about the implicationsof possible new broker disclosure requirements for managing generalagents. From the MGA level, we do so much different, but we do nothave an opportunity to negotiate fees or contingents,” said Mr.Moore, president of The Southern General Agency Inc. in BowlingGreen, Ky. “The only contingents we get are based on if we producean amount of business with a favorable loss ratio.”

He added that the contingents are a bonusan incentive based onour underwriting ability. It helps to pay for the overhead and topay for the future, but its not predictable.

In this whole debate, I dont know of anyone who has doneanything illegal who is a wholesaler, observed Richard Bouhan,executive director of NAPSLO. The approach that has been taken isaimed at disclosure, not a ban on contingents.” He added that“consumers should be aware that [contingents] exist, but we dealwith the retailerour compensation is on commissions from thecompany. It is not paid by the consumer. Thus far, it seems to bethe way the NAIC is putting forth its bill.

One concern is how regulators will begin to respond to events,noted Mr. Polizzi. There could be something, an overreaction, hesaid. What we have seen so far is a recognition that theintermediary [wholesaler] plays a different role. The term'contingent' gets thrown around, bundled with any kind of incentiveplan. The contingent we talk about participates in the resultsitsnot based on production. If we produce quality business with lowloss ratios, then the incentive is to keep working with thatcarrier. It's quality over quantity.

In New York, Daniel F. Maher, executive director of the ExcessLines Association of New Yorka stamping office set up by statestatute charged with overseeing compliance with the states excesslines lawsaid the rules on disclosure are strict in New York. Ifthere is a fee received over and above commission, the broker musthave a written agreement with the insured that he or she agreeswith it, he noted. There is no distinction on disclosure amongdifferent types of brokers, he added.

There is a lot of confusion over contingent commissions becauseof the Marsh probe by New York Attorney General Eliot Spitzer thatled to an $850 million settlement on Jan. 31 (with no admission ofwrongdoing), he noted. However, he added that the wholesalecommunity is not in a position to put any kind of leverage oncarriers, such as that allegedly exerted by brokers at Marsh.

Most brokers are on the receiving end to what the carrierswantthey have the upper hand to dictate terms, he observed. It wasthe other way around with Marsh.

However, he noted, carriers are not coming to their brokers anddemanding a new compensation program. There have been discussions,he said, but no talk of change. He noted, too, that unlike theretail brokers, who can make commissions up to 20 points,wholesalers generally work on a thin margin of five pointscommission, with a high of 10-to-12 points in a few cases.

Instead of creating a new set of regulations, Mr. Maher argued,regulators should look to enforce existing laws. “Wholesalers aregetting swept up into something that they could not have gotteninvolved in in the first place,” he said.

The kind of changes that would benefit the wholesale communityshould involve uniformity and clarity of regulations, he added.

“I dont see any dynamic change on the way at the moment,” hesaid. “My key thoughts on this are, if something does come out ofit, it should be, 1) to enforce the laws that are already on thebooks, and 2) it would be sad to think that the whole industry ispainted with a broad brush that says it has engaged in the kind ofconduct that is the fault of a few.”

He added that “the market clout Marsh has, no one comes closeto. It would be appropriate for people to stand back and thinkabout that when they consider whether the market is fair to buyers.Before there is a big market fix, we should make sure there issomething to be fixed market-wide.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 11, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.