The never-ending search for a magic elixir that will generate growth and put more money into company coffers during a soft market has led some specialty carriers to rethink the entire wholesale-distribution system.
According to a report by Conning Research & Consulting on the property-and-casualty specialty-insurance markets, a number of insurers are offering specialty products and programs directly to retail distributors—skipping wholesale brokers and managing general agents (MGAs).
There has been “a proliferation of online portals funneling business to a number of destinations and bypassing the multi-tiered specialty-distribution system,” the report says.
Clint Harris, director of insurance research for Conning, says there are a “great number of portals specifically designed to attract a particular niche” of business, complete with detailed information about the insurance available—and even the opportunity to receive an insurance quote.
“One month we looked to get the number of these portals—and then there were a lot more when we looked just a month later,” Harris adds.
What are some of the factors helping to fuel this incipient trend of skipping the wholesaler in favor of electronic exchanges?
The soft market is clearly one, says Wayne Carter, executive vice president of Crump Insurance Services, whose product expertise includes open brokerage, MGA facilities and numerous specialty programs.
A tough business climate for insurers “creates pressure to move more direct, as there is a heightened emphasis on expense management,” Carter notes.
Chris Zoidis, vice president of the special-risk division at Burns & Wilcox, agrees that a soft market—and one which has lasted a long time—is a key reason why the direct-distribution model is growing in appeal.
“We are in the midst of a prolonged soft market, so insurance carriers are desperately looking for any silver bullet that will generate growth,” Zoidis adds. “That leads to all sorts of changes—changes in distribution strategy being one of them.”
Other factors leading to carriers’ choice toward the direct-to-retailer route include changes to a carrier’s senior management—
or an acquisition by a company with a different philosophy.
Another factor is the arrival of a number of brand-new E&S players looking to get the word out about their brand and to build a specialty reputation with the broadest possible audience as quickly as possible.
Then there’s a factor that won’t go away even as the market hardens: The Internet simply makes it much easier to both find and disseminate complex information—a fact which has been putting pressure on intermediaries in all business lines.
What all these factors add up to: “There are a number of new opportunities out there for buyers and retail agents; the information [about available coverages] is simply much greater than it used to be,” Harris says.
THE WHOLESALE VIEW
In addition to the findings in the Conning report, this emerging trend of carriers leveraging the web to bypass wholesalers was definitely noted—and heatedly discussed—at a National Association of Professional Surplus Lines Offices (NAPSLO) forum in Florida earlier this year.
But brokers are not yet ready to classify the possibility for an online end run around their services as a serious threat. (In fact, some brokers have started to partner with exchanges: see sidebar.)
Electronic exchanges “are in their early development stages; they aren’t universally utilized yet,” says Burns & Wilcox’s Zoidis.
Some carriers, Zoidis notes, have a dual model, using both retail- and wholesale-distribution channels, but “it is not necessarily something we are seeing in our business,” he says.
“There is a core set of E&S carriers who are wholesale dedicated,” Zoidis adds.
EXCHANGES VS. EXPERTISE
While an exchange can theoretically mean lower costs or broader exposure for a carrier, the expertise that wholesale brokers can provide to accurately place risks—especially unique ones—appears to still be easily overriding these potential advantages.
And brokers say the value they add in the distribution chain is high enough—and irreplaceable enough—that it’s unlikely many carriers will ever feel any urge to exclude them as part of the distribution system.
As an example of that expertise: “I get a call about a risk and I know where it fits in the market,” says Mick Kroll, senior vice president of AmWINS Insurance Brokerage of California. “I can come up with a quote that stacks up to the market. I know the carrier’s appetite. A retailer doesn’t know that.”
Zoidis adds that the market expertise wholesalers bring to the transaction equation—and for which they earn their money—increases the success rates of their carrier and retail-broker partners.
The Conning report, too, points out some of the drawbacks of the direct model.
An increasing use of direct-to-retail exchanges means “there is an increasing risk that an inadequate volume of customers to reflect the true market will flow into the desired programs,” reads the Conning report.
“Insurers may not be getting a representative example of the marketplace,” adds Harris. “Data to, and therefore the longevity of, programs might be endangered.”
Harris concludes: “Vetting how good a program is…that’s the value a wholesaler brings.”
CARRIERS CONFIRM COMMITMENT
At the NAPSLO forum in March, where the topic of direct-to-retail distribution was very much top of mind for the wholesale community, specialty insurers affirmed their commitment to the wholesale-distribution system.
Tony Markel, vice chairman of Markel Corp., said wholesalers are relied upon to relay clients’ needs to insurers. He called wholesalers the “eyes and ears on the ground” and said Markel guards its relationships with wholesalers “zealously.”
Stan Galanski, president and CEO of Navigators Group, said at the mid-year NAPSLO conference that it is more efficient to work with the wholesale community to get the scale it needs in specific businesses.
James River Insurance Co. is another carrier that says it is committed to the wholesale-distribution model.
“It is a very efficient model for aggregating business,” says John Clarke, senior vice president of marketing for James River. “We can’t replicate it and we wouldn’t want to. They have a great knowledge of the local markets; they are a conduit to a world of access.”
Clarke says some carriers play both sides—using multiple distribution models. But James River thinks wholesalers provide a great pathway for retailers to “broaden their reach,” since wholesalers have access to many more markets.
But that doesn’t mean that Clarke is writing off the value of exchanges, either.
They are “potentially very useful” and could “fundamentally change the role of the wholesaler, leaving them out in the cold,” he adds.
“No one knows where they [exchanges] are headed yet,” Clarke says.
QUESTION OF COMPLEXITY
Where exchanges are most likely to find the greatest traction is with the less-complex specialty accounts—where expertise is widespread and/or relatively easy to acquire—as in the restaurant space, for example.
Because there are so many restaurants, and retailers are continuously presented with the risk (and since carriers have developed prepackaged policies), it is possible for agents to “understand that business very well,” says Carter of Crump.
And when it comes to small but complex pieces of business, exchanges—perhaps ones run by brokers—could be superior ways of handling these types of transactions.
“These electronic exchanges may be a more efficient way of handling small business. The small-premium-sized accounts that require special expertise will benefit from a wholesaler who can provide an exchange to streamline the process,” says Carter. Crump, in fact, is developing just such an electronic exchange to handle this business, he adds.
(As a side note, Carter says he did see some business go away due to carriers going direct to retailers when he was president of Target Insurance Services, a managing general underwriter that was acquired by Crump a year ago.)
MARKETSCOUT WHOLESALERS EXCHANGE
So what do those running an exchange have to say about their role in the industry?
MarketScout Wholesalers (MSW), led by former Crump Inc. CEO Glenn Hargrove, was launched by electronic-insurance-exchange MarketScout last year.
Hargrove says MarketScout allows retailers to access a “one-stop supermarket” for placement data. However, the idea that exchanges will replace wholesalers is not accurate.
“If it’s that easy to go on and place the risk, then it probably didn’t deserve to be in the wholesale market anyway,” Hargrove says.
“The view that the exchange is a replacement for wholesalers is misguided,” he continues. “You still have to have wholesalers on the back end to get the deal done.”
In other words, the exchanges do not stop wholesalers from carrying out their objectives as aggregators and technical experts. If wholesalers cannot add value, then there is no sound reason for them to be involved in the transaction, Hargrove says.
“The focus is on adding value, and only those wholesalers that lack in that area will suffer,” he says.