Filed Under:Agent Broker, E&S/Specialty Business

Wholesale distribution channel is less expensive than retail, report says

This misconception has caused brokers to forgo the wholesale distribution channel and miss access to markets, NAPSLO says

Conning's analysis says total costs in the wholesale distribution channel are one percentage point less than retail. (Photo: iStock)
Conning's analysis says total costs in the wholesale distribution channel are one percentage point less than retail. (Photo: iStock)

A recent report from investment management firm Conning & Co.'s Insurance Research Division dispels a long-held misperception that the wholesale distribution channel is substantially more expensive than the retail channel when it comes to placing specialty risks.

The report, which was commissioned by the National Association of Professional Surplus Lines Offices Ltd., a trade group that represents the surplus lines industry, analyzed distribution around cost structure and ratios between the wholesale and retail channels.

The misconception that wholesaler expertise costs more than it does “could cause retail agents and brokers to overlook insurance solutions offered by wholesalers when, in fact, leveraging a wholesale partner to find the best and most cost-effective solution for the insured is the best way to serve the insured," Brady Kelley, executive director for NAPSLO, tells "The wholesaler’s value — technical expertise, innovative solutions to complex risks, access to strong and stable surplus lines insurers — adds no cost to the transaction."

Kansas City, Missouri-based NAPSLO and Hartford, Connecticut-based Conning identified two composite groups of insurance companies for each type of insurance distribution for selected commercial lines. Insurers that use wholesale brokers as their predominant distribution are the "wholesale composite," and included 83 companies with $19 billion in premiums. Insurers that use retail brokers as their predominant distribution are identified as the "retail composite" in the analysis, and Conning included 266 companies with $61 billion in premium. (Data came from A.M. Best.)

The composites only included insurers with at least 70 percent of total direct written premium in commercial property and casualty lines of business, with an aggregate of at least 70 percent direct written premium within these selected commercial lines: 

    • Allied lines.
    • Commercial auto.
    • Commercial multiperil.
    • Earthquake.
    • Fire.
    • Inland marine.
    • Medical professional liability.
    • Ocean marine.
    • Product liability.
    • Other liability.

According to NAPSLO, these criteria excluded nearly 2,500 insurers from the analysis.

"The study is very important in demonstrating that wholesale distribution is not more expensive than retail distribution," says Robert Sargent, former NAPSLO president and founder partner of Tennant Risk Services in West Hartford, Connecticut. "And because a wholesale insurance broker brings expertise along with market access to retail insurance agents and brokers, the value proposition for wholesale distribution is very compelling."

Conning measured all non-loss costs relative to direct written premium from 2010 to 2015 for these companies and compared the composites, finding that the total non-loss cost ratio for the wholesale composite was lower than retail by 1 percent (see graphic, below).


Click to the next page for more information from the report.


Source: Prepared by Conning Inc. Data source: A.M. Best Co.

Wholesale commissions higher than retail 

In addition, retail non-loss cost ratios were lower than wholesale in 2010 and 2011, but wholesale ratios were lower for 2012 to 2015.

The analysis also says that the wholesale composite's commission ratio is consistently three to four points higher than the retail composite (see graphic, above), but is offset by the wholesale composite's non-commission costs ratios, which average nearly four points lower than the retail composite. According to Conning's analysis, in 2015, the median annual non-commission cost ratio for the retail composite was 16.4 percent, but for the wholesale composite was 11.8 percent. 

"A presumption that wholesale distribution is more costly than retail has at times led retail insurance agents and brokers to fail to explore the options for their clients that are only available via wholesale brokers," says Hank Haldeman, NAPSLO past president and executive vice president and  director of the Sullivan Group in Los Angeles. "Those options may include broader coverage and/or more competitive terms. Further, the misconception has caused some retail producers to forego the value of creativity, expertise and market knowledge that a wholesale can bring to the placement, under the incorrect assumption that there would be additional cost associated with this added value."

Results by line

The median annual non-loss cost ratio by line, over a six-year period, showed mixed results, Conning says. The lines with the greatest differential were inland marine (retail 3 percentage points higher) and medical professional liability (wholesale 3.9 percentage points higher). The wholesale composite only had higher non-loss cost ratios for medical professional liability, fire and products liability lines.

"We are encouraging members to leverage the report with their clients to dispel the misconception and to ensure a better understanding of the facts regarding the cost structure and ratios between the channels,” added Kelley. “We want all retail agents and brokers to know that, while there has never been a price for seeking a wholesale quote, we now know there is no additional transition cost in leveraging a wholesaler to find the best solution for the insured.”

Have questions? NAPSLO has a FAQ for members to reference when reading the Conning report on its website.

Related: Expertise matters: Making the case for the wholesale distribution system


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