As retail brokers struggle with the declining revenue of a continuing soft market, they are engaging in some activities that frustrate wholesale brokers, according to E&S broker executives.
“It is not uncommon for us to do a placement 100 percent, and then for the [retail] broker to come in after the fact and hijack certain pieces because they can go direct,” reported David Pagoumian, president of Iselin, N.J.-based NAPCO.
The extent of the problem of disintermediation, or even partially cutting the wholesaler out of the picture, is not as great as in the “post-Spitzer era,” he said, noting that the appropriate response from wholesalers is the same now as it was then–demonstrating enduring value to retail customers and their insureds.
He described how wholesalers survived scrutiny into the cost of their services at a time when wholesaler involvement in placements became more visible–in the era of full disclosure that emerged following the 2004 investigations of the insurance brokerage industry by former New York Attorney General Eliot Spitzer.
“To be wholesale, you really have to specialize in something–you have to do something different that delivers value,” said the executive whose firm specializes in analyzing and transferring property-catastrophe risks.
With that dark episode behind insurance brokers of all stripes, retail hijackings are taking place today simply in response to present economic and market conditions. “Everyone is looking at what they can do inside their own houses” to generate revenue, including retailers, Mr. Pagoumian said. “It’s a sign of the times.”
There are situations “where we’ll start the deal. We’ll pilot the program to completion, and once we’ve got it up and running, on the next renewal, certain clients might want to back come in and take over specific pieces.”
“That could just be the way business is going to be going down the road, and as big boys and girls, maybe we just get used to it and make sure we identify that out of the gate,” he said. Still, there’s a nagging sense that “if we’re the guys that built the structure, then perhaps we should be allowed to build it next year.”
“Nothing is forever though,” he said, seemingly resigned to the situation.
“I find the best medicine is just to do a really great job,” when pressed further for possible proactive steps that wholesalers are taking to curb such activity in the future.
“I call it customer euphoria. If we can make them feel so euphoric about us” doing our work, then even when they consider bringing accounts in house, they won’t want to ruin a great thing. “If you’re doing such a great job, then the temptation to drag it in house is not as great as the desire to let us handle it,” he said.
Scott Smith, president of S.H. Smith & Company in Hartford, Conn., faces similar situations on directors and liability insurance business that his firm places.
He referred specifically to second-tier national retail brokerage houses that have direct access to some of the same key D&O insurance company markets as his firm. “Most agents allow us to go to Chubb or Hartford or Travelers, because they’re scared of D&O. They think it’s complicated, and guess what–it is.”
S.H. Smith’s team of 20-some D&O experts can also make recommendations for additional extensions of coverage that the wholesaler can get out of the specialty insurers, which retail agents can not obtain.
“We have a litany of claims examples where [carriers have] denied simple claims that should have been covered, but the placing agent or broker didn’t know enough to push for extensions of coverage, Mr. Smith said.
For years, the retailers bought into the need for wholesalers on D&O placements in spite of the access they had to carriers. “We’re uncomfortable with D&O. We need an expert. We use Smith,” they reasoned.
Now, revenue-focused Wall Street investors and private equity owners of some retailers are forcing a different scenario to play out, he said. The retailers will roll up all of the carrier’s D&O business, take it to the carrier, “and put a gun to [the carrier's] head, saying you have to take this directly from us.”
“Simultaneously, they turn around to us, put a gun to our head and say if you don’t allow us to move everything to [the carrier], we’re going to move everything else we have,” he reported.
He explained that the retailer might have a $5 million relationship with Smith, consisting of $1 million of nonprofit D&O placed with the D&O carrier, another $1 million of umbrella business with a different carrier and three $1 million chunks on different lines placed elsewhere. The D&O carrier may not agree to take the business directly without the wholesaler’s okay, but the retailer threatens that it will move the other four programs to Swett or to some other wholesaler if Smith doesn’t agree to allow the D&O program to go, he said, explaining the gun-toting analogy.
“So fine, they succeed moving a couple of million in nonprofit D&O business” directly to the carrier, suggesting that retailers repeat the same process with other D&O wholesaler specialists. “In the meantime, their people on the front lines are terrified. They don’t know what they’re asking for.”
The retailers that engage in these practices are treating D&O “like a commodity–like a BOP [businessowners package] policy–and it’s not,” he said.
One of the competitive advantages that S.H. Smith brings to the E&S market is a team of “very good coverage people” with extensive backgrounds in commercial underwriting. “We do well with risks that have a wrinkle–that the standard market doesn’t have a shelf product for–and we’re constantly trying to expose that wrinkle of coverage,” he said, giving the example of adding a design E&O piece to a manufacturing or construction account.
“We have great partnerships with ‘A’- rated markets that allow us to manuscript things and put them on the policy,” he said. “As you can imagine, however, not every risk cares.” Many are just looking to get coverage to satisfy a third-party–a bank relationship or an equity relationship.
While Mr. Smith said his firm has historically demonstrated expertise in a wide spectrum of specialties spanning everything from D&O and E&O to personal lines, the wholesale brokerage arena is being cluttered by startups in 2010, he reported.
“There are seemingly every day new entrants,” he said.
“We have established retail relationships. And when we try to reestablish them [in instances] where they’re not as strong as they once were, we find a parade of wholesalers lacking our credentials just muddying the message.”
In addition, some newbies have “stolen” employees from established firms like S.H. Smith “by paying outrageous compensation packages,” he asserted.
“What they’ve done is nothing new. They haven’t invented a new way to distribute product,” Mr. Smith said.
In spite of that, the new firms have little trouble getting the attention of carriers and retailers, he reported. Carriers that claim to prize financial stability and ethical operations “have turned over and given these brokers all the markets they want because they’re all looking for more business” in the soft market. “And the national retailers are the same way.”
“It just creates much more noise in this space,” Mr. Smith said.