Review and Outlook 2009-2010: Wholesale Brokers, MGUs and MGAs

What is the status of today's wholesale insurance industry, and where do you see it heading in the next 5 years? J. Neal Abernathy: The lines between wholesale and admitted business have been blurred so much that there is not much of a distinction between them. This has happened not only because of changes in the insurance market but the economy as well. Insurers and others are getting into classes and areas of business that have historically been more wholesale oriented. We're also seeing many of those companies opening up E&S operations within their structures. There is definitely a place for us from a distribution standpoint, and from a resource capabilities standpoint, but it's different from the old days, when some classes of business such as contractors were automatically an E&S play, and all we had to do was wait for people to call us to help them with their contractor business. Today, we have to aggressively find solutions to insured's coverage needs. Our biggest challenge is to provide value to retail agents and insureds, a paradigm shift away from looking at ourselves as one segment of the business. Most importantly, we must differentiate ourselves in the marketplace to compete. One thing we are doing is making a push for our people to work together, which isn't how wholesalers traditionally operate. We must make sure that we're bringing our best resources to bear for our clients. Alan Jay Kaufman: On the macro level, the world economy is depressed, and that in itself has a huge impact on the industry. Businesses are contracting, there are fewer receipts and less construction, which affects everyone. Until this turns around, all insurance business will be affected. However, this doesn't mean there aren't any opportunities out there. In our short-term planning for the next 2 years, we're expecting that the economy will remain flat. In looking at 5 years, if the economy changes significantly, there will be more opportunities for insurers, whether retailers or wholesalers. The wholesale business will continue to play a very important role in certain U.S. industries, especially in niche products like environmental, EPLI, pharmaceutical product development and consulting, and professional liability for consultants. We're targeting areas like data breach as an important growth segment, as well as technology, healthcare to meet the needs of the baby boomers, and professional liability for environmental consultants, educators and the healthcare area. We've seen 25 percent year-over-year growth in our vacant property coverage, for both personal and commercial lines. We have promoted this specialty a great deal and can quote and bind coverage more quickly because we have in-house underwriting authority. Bill Pritchard: I see the wholesale market continuing to provide effective coverage for non-standard risks. However, I believe the definition of what a non-standard risk is will change. As today's challenging exposures become commonplace, new issues we've barely begun to address will need the same creativity and responsiveness that has been the hallmark of the E&S industry. Frankly, I think 2010 will be a tough year for the E&S business. A slower economy, coupled with enhanced competition, will mean that we will all continue to work hard for the business we write. I believe late 2010 into 2011 will be when we see the market start to pick up steam again. Curtis Anderson: Today's wholesale industry is more resilient than ever. In spite of the softening market and the less-than-robust economy, people still need insurance. The wholesale industry continues to be an innovator of new products and is ready to tackle new exposures. The overall premium volume may temporarily be down, but the item count is still increasing. The wholesale industry is in the business of taking risks. The professional wholesaler is good at understanding risk and creating options for customers and businesses that need insurance. Preferred carriers in the standard lines, admitted marketplace are feeling the pressure of increasing loss ratios and reductions in investment income. The wholesale industry has grown more rapidly than the rest of the marketplace for the last 20 years, and I expect it to continue to do so in the future. The wholesale industry is nimble and quick to accept challenges and opportunities. I see the next 5 years as a good time to be in the wholesale industry. There is plenty of capital and a better than average return for those in the wholesale industry. Joe Hutelmyer: The wholesale insurance industry remains strong and the drop-off in premium writings is not unusual and part of the normal cycle. The economy has also had a significant effect on premium writings, as entrepreneurs are reluctant to invest in new products and business opportunities, a stronghold of the E&S industry. Also, industries such as transportation and construction have been hit particularly hard by the economy and as a result have limited growth in these market segments. In the next 5 years I expect to see:

  1. The wholesale/E&S segment will be made up of a fewer number of larger MGA/wholesalers
  2. Most will be highly specialized, targeting specific niches in the market
  3. To succeed, all must rely on the latest technology that will closely align them with their retailers, and paper files and policies will no longer exist
  4. Because virtually all of the standard markets have ceased or dramatically cut their training and education, most of the underwriting expertise in the market will be found on the wholesale/MGA side creating outsourcing opportunities for our segment.

Francis "Frank" Mastowski: In 2009, reduced premiums have put pressure on many wholesalers to reduce expenses and personnel to survive. Several wholesalers have sold their operations to larger public firms, and this is still occurring throughout the marketplace this year. Wholesale firms are becoming larger and more revenue driven by their new owners. Over the past couple of years, many new company startup operations have entered the marketplace, using wholesalers as their primary distribution method. This adds pressure on wholesalers to determine the number of carriers it needs to quote and write business for their retail producers. Many established wholesale firms are trying to maintain their production with companies who have supported them previously. As these newer company entrants are unable to contract with the established wholesalers, it opens opportunity for other wholesalers in need of markets and allows them to compete as these carriers appoint their second choice wholesalers. Another major concern wholesales face is the cost of IT and the accompanying systems. Wholesalers' budgets that cannot support technology costs will have major service issues. Improvements in information and data transfer are essential to the transactions occurring among companies, wholesalers and the retail producer. Technology, along with the costs, will only continue to rise over the next 5 years. There is no clear crystal ball as to the future of the wholesaler over the next 5 years. The economy will likely take a toll on start-up operations and jobs over the next few years. This will slow the growth of new business available to the wholesaler. Premium levels will likely not grow significantly over the next couple of years. It is likely that more wholesalers will sell to other wholesale firms, as the cost of doing business gets more difficult to control. Along with the large wholesalers, there will still be independent wholesalers who have the ability to spend on technology, staff and improved systems. They will survive and grow over the next 5 years by using their entrepreneurial spirit and the relationships they have established with their customers. Sometime in the next 5 years it is likely we will see a pricing increase for insurance, created by either a catastrophe or the loss of income caused by the soft insurance marketplace. History will repeat itself.

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