Can Retailers, Wholesalers Co-Exist In The Same House?
One strategy the financial industry has developed to retain customers is creation of the one-stop shop. Bankers, for example, have purchased or created their own insurance agencies to keep more of their clients' business in house.
The same type of thinking went on at major insurance brokers Marsh, Aon, Willis, Arthur J. Gallagher and others which brought wholesale brokerage houses under their roofs to provide all the insurance services to meet a commercial clients needs. It also helped to bring in additional revenues.
While no criminal or civil charges have been brought against the wholesale units of these firms by New York Attorney General Eliot Spitzer, there are some legal challenges that could upset these relationships, industry observers warn.
In one class-action case, which pits Opticare Health Systems Inc. and similarly situated plaintiffs against 35 brokerage firms and insurers (notably the top brokers in the United States), the plaintiff charges a massive racketeering scheme to manipulate the commercial insurance market.
The suit, in part, charges that the wholesale units are part of this scheme, and their relationships are not disclosed properly by the brokerage firms. (For background, see NU, Nov. 1, 2004″Marsh, 8 Other Brokers Sued For Racketeering.")
Like the issue of how the contingency fee scandal could affect wholesaler brokers, insurance industry representatives were not certain where the relationship between the retail and wholesale units of these firms would end up. However, they said that the scandal which prompted mega-brokers to stop accepting contingency fees could very well alter their relationships with wholesalers.
Not speaking directly to the Opticare lawsuit, which he was not familiar with, Richard Polizzi, president of the National Association of Professional Surplus Lines Offices, Ltd. in Kansas City, Mo., said he thought the contingency fee abuse scandal could have an impact.
"It could affect those brokers who have wholly-owned wholesalers, but in my experience, they use other independent wholesalers on a regular basis," said Mr. Polizzi, who is also president and chief executive officer of Western Security Surplus, a wholesale brokerage firm in Pasadena, Calif.
"They don't get all the placements done in-house. That's a pipe dream," he said. "We and others deal with them for many different reasons. They don't have access or lack the personal contact. There is a myriad of reasons why we get the phone call."
For his part, Richard Bouhan, NAPSLO executive director, said he was not sure how the scandal would affect the major brokers' wholesaler units, but he questioned whether they would maintain the link. "They may find that it is a relationship that they do not want to continue," he said. "It depends on the final outcome of this issue."
While it made business sense for the brokers to acquire or create wholesale units within their firms, today it is being viewed as a cozy relationship between retail and wholesale businesses that is taking on sinister overtones in the eyes of some, observed Daniel F. Maher, executive director of the Excess Lines Association of New York.
"A question has arisen," he said. Retail brokers "have to look up and say, 'Let me divest myself of the thing that is giving me a black eye for all the operations [such as contingency fees].' They have to look at wholesale units for the same reason."
"In the market, that is some of the talk. It certainly has been a conversation," Mr. Maher added.
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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