Surplus Lines Brokers Caught In The Crossfire
Wholesalers, MGAs distinguish role from retailers; saying they cant steer clients

The fallout from the insurance industrys contingency fee scandal appears to be pointing toward stronger disclosure regulations for retail producers, but what changes may come for wholesalers appears ambiguous at best.

Officially, the two major surplus lines groupsthe American Association of Managing General Agents and the National Association of Professional Surplus Lines Offices, Ltd.both want to see wholesale brokers exempt from disclosure notifications to the consumer.

Their reasoning, according to Richard Polizzi, president of the Kansas City, Mo.-based NAPSLO, is that wholesalers do not do business 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 the transaction. Once we release a quote, we have no influence over the decision-making process. When we have come up with the terms of the request, we sit and wait.”

At the moment, the National Association of Insurance Commissionersheadquartered not far from NAPSLO in Kansas Cityappears to be leaning toward recommending that wholesalers be exempt from disclosure regulations. However, that does not mean when it comes to the issue of compensation for wholesalers it will be business as usual. This is not to say there are rumblings for reform, but simply it is hard to predict what the future might hold in this volatile political climate, industry players concede.

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

Its a darn good question, said Ronnie Moore, a past-president of King of Prussia, Pa.-based AAMGA, when asked about the implications of possible new broker disclosure requirements for managing general agents. From the MGA level, we do so much different, but we do not have an opportunity to negotiate fees or contingents,” said Mr. Moore, president of The Southern General Agency Inc. in Bowling Green, Ky. “The only contingents we get are based on if we produce an amount of business with a favorable loss ratio.”

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

In this whole debate, I dont know of anyone who has done anything illegal who is a wholesaler, observed Richard Bouhan, executive director of NAPSLO. The approach that has been taken is aimed at disclosure, not a ban on contingents.” He added that “consumers should be aware that [contingents] exist, but we deal with the retailerour compensation is on commissions from the company. It is not paid by the consumer. Thus far, it seems to be the 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, he said. What we have seen so far is a recognition that the intermediary [wholesaler] plays a different role. The term 'contingent' gets thrown around, bundled with any kind of incentive plan. The contingent we talk about participates in the resultsits not based on production. If we produce quality business with low loss ratios, then the incentive is to keep working with that carrier. It's quality over quantity.

In New York, Daniel F. Maher, executive director of the Excess Lines Association of New Yorka stamping office set up by state statute charged with overseeing compliance with the states excess lines lawsaid the rules on disclosure are strict in New York. If there is a fee received over and above commission, the broker must have a written agreement with the insured that he or she agrees with it, he noted. There is no distinction on disclosure among different types of brokers, he added.

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

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

However, he noted, carriers are not coming to their brokers and demanding a new compensation program. There have been discussions, he said, but no talk of change. He noted, too, that unlike the retail brokers, who can make commissions up to 20 points, wholesalers generally work on a thin margin of five points commission, 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 are getting swept up into something that they could not have gotten involved in in the first place,” he said.

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

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

He added that “the market clout Marsh has, no one comes close to. It would be appropriate for people to stand back and think about that when they consider whether the market is fair to buyers. Before there is a big market fix, we should make sure there is something 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Surplus Lines Brokers Caught In The Crossfire

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