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:
- The wholesale/E&S segment will be made up of a fewer number of larger MGA/wholesalers
- Most will be highly specialized, targeting specific niches in the market
- 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
- 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.
Are you still seeing a significant portion of your business reverting to the standard insurance market?
Abernathy: This is becoming less and less of a factor because it hinges on the market turning, and we aren't approaching the business as if the market will be turning anytime soon. Everything we write is because we have the best deal in some form or fashion, whether we're competing with other E&S markets or standard markets. We still must have the best deal available for the insured to have a seat at the table, so it doesn't matter who the competition is.
Kaufman: We're still losing business to the standard market, but I don't see this increasing with the same intensity as it did from 2008 to 2009. The trend is still going because the standard markets are bottom feeding until the economy improves, insuring risks today that they normally would have avoided in the past, but we're seeing less of that.
Pritchard: In our specialty segment of the marketplace, we are not seeing much increased competition from standard carriers. Our competition has come from a huge influx of E&S carriers into the environmental insurance niche.
Anderson: "Yes" would be the answer, but the movement to the standard insurance market has slowed and I would not say it is a significant movement any longer. While some business is still moving into the standard insurance market, accounts are starting to move back into the wholesale marketplace–and those new businesses and accounts with loss issues are offsetting some of the continued loss of accounts.
Hutelmyer: We are not seeing a portion of our business reverting back to the standard marketplace, but our marketplace is looking at a smaller risk pool as a result of the economy.
Mastowski: The standard markets have picked over the bones of the surplus lines markets several times over the past few years. The first half of 2009 saw that trend continue. The third quarter seems to have slowed that trend, as the business likely remaining with many wholesalers is truly surplus lines or cat exposed. Admitted carriers that try to write the remaining business left in the wholesale market are driven by marketshare. They are not trying to underwrite to a profit and, as history shows, the results will lead to changes of management to "clean up the mess." However, there is still an abundance of capital within the insurance industry chasing business. This may push some admitted carriers into trying to pick off classes or program business from the wholesale community.
If a major cat occurs and the admitted companies need to raise capital, they will have a much larger problem by having written the surplus lines marginal business, which historically has a longer tail and will need more attention when the company can least afford to increase reserves.
What were your biggest challenges in 2009 and how did you overcome them?
Abernathy: We can work within the confines of whatever the insurance marketplace throws at us, or face the economic issues, but when you put the two together it makes for a very trying time. We saw a number of insureds who might have spent $500,000 on insurance last year, but this year have told us they're only spending $400,000 because of the economy, and we have to buy what we can with that amount. When the economy is in a difficult state, it affects all lines of business.
We write a lot of construction business, and the only positive signs we're seeing in the economy now is that there are many projects moving into the design phase now, which is encouraging. For example, we recently wrote a large construction wrap-up for a big government project. However, projects in the design stage now won't start actual construction for 6 months to a year, if they start at all.
On home construction, we are seeing some of the high-end custom builders on the West Coast are continuing to build, but the big tract home builders are not very active. There is just no credit available, even if someone wants to build.
Kaufman: Obviously, the economy was our biggest challenge. Companies that want to be around must be smarter about the type of people they are hiring. Because we fit in that category, we have had to make sure we have the right players on board. Though we have made staff reductions due to attrition and right sizing due in part to advanced technology, we have cut less than 10 percent of our work force.
We have also switched people to different areas of the company where we see more growth. We've beefed up our personal lines business, which has grown a little over 6 percent. This includes insurance for high-value homes, coastal property, and homes in flood plain areas and earthquake zones.
Pritchard: Without question, our biggest challenges were the soft market, the recession, and new competition. We handled the year by sticking to what we do well, and by focusing on getting our agents to see the value of working with Beacon Hill. While we have not had a record-breaking year by any measure, we are very pleased with how we've fared.
Anderson: Our biggest challenge was not understanding how deep the economy would sink. It's hard to reduce expenses fast enough to keep pace with the reduction in exposure base, loss of clients and loss of revenue, and finding the necessary dollars and staff to allow us to keep up with technology as item count stayed up but staff and revenue were reducing. The entire wholesale industry is working hard to support the needs of their clients and the insureds. I believe most firms have reduced their expenses as much as they can and are working hard to sell more insurance and add new clients to increase revenue as we push toward 2010.
Hutelmyer: The economy was our largest challenge in 2009. We specialize in "wheels" business, from 18-wheel long-haul truckers to limousines. All have been hit extremely hard. Fewer goods are being produced and fewer homes are being built, causing many truckers to go out of business, with a failure rate up over 250 percent. Fewer major corporations are hiring limousines to transport their executives and as a result, one in three are failing. To overcome this challenge, we continued to diversify our book and product offerings and are getting ready to announce a new exclusive program. We also shifted our focus to smaller risks and improved technology to enable us to provide timely quotes on more business with our existing staff.
Mastowski: The biggest challenges in 2009 were maintaining revenue and not downsizing our staff. Downsizing would have affected our ability to service. As an independent, this was easier for us since return on revenue can be viewed from a longer-term perspective. While our profits were down a few percentage basis points, we accepted those conditions as part of the insurance market cycle. Our experienced team stayed intact. In late 2008, we acquired another wholesale operation, which brought us not only an additional platform, but also an opportunity to cross sell other lines of business.
Are you seeing signs of market hardening in any areas or lines of business?
Abernathy: Professional liability for financial institutions has definitely tightened up, although it will be interesting to see how that market responds going forward. The only way the market will harden is if excess capital goes out of the marketplace. We were just at the CIAB and NAPSLO meetings, where there were 4 or 5 new or freshly capitalized entrants that want to be big factors in the professional liability marketplace, which means the market won't turn if new capital keeps coming in.
The only way the market will harden is if capital goes out of the marketplace, and I'm not sure that a big natural disaster will drive it. Inflation is one factor that might lead to a tightening of the market. We've had mild inflation for years, so if it went from 3 percent to 8 percent in a year, that could impact everyone, whether they write catastrophic property, auto or health.
Kaufman: No. If anything, in September and October we have actually seen some loosening of underwriting standards as companies are generating an interest in taking on our business, niche business they wouldn't ordinarily want, but they need to make up for losses in premium volume.
Pritchard: We are beginning to see signs of firming in auto and workers' comp rates. These are non-specific environmental lines. In the true environmental coverage areas, we are seeing continued rate erosion as new companies come in and try to capture market share.
Anderson: I would not say there is a hardening of the market, but I would agree that there is a flattening of rates. We have been lucky this year from a property standpoint, with no major hurricanes in the U.S., although we still have the 4th quarter and winter weather possibilities. The rest of the world has seen some very difficult catastrophes, and the reinsurance marketplace is worldwide.
As we see an uptick in the economy and a continued uptick in the loss ratios–and assuming inflation doesn't provide for increased interest rates and robust investment opportunities for the carriers–I feel confident there will be some increase of rates and exposure basis during 2010. With that said, I also thought we would see that in 2009, and we are not.
Hutelmyer: No, we are not seeing signs of the market hardening in our classes of business anywhere in the country.
Mastowski: There has been some hardening for D&O coverage. Windstorm exposed risks are still being non-renewed by admitted markets because of the amount of exposure indicated by their cat modeling. However, there is still a sufficient amount of capacity, both admitted and non-admitted, that will compete for that business.
The reinsurance markets are being more sensible than they were in the past. They are maintaining rate levels and not continuing to support the downward rate trend. This also is reflecting on some of the displacement of cat-exposed business. However, it is unlikely that any real hardening of the market will occur in 2010 unless a major cat occurs.
Do you see any emerging opportunities for wholesalers in 2010?
Abernathy: Over the past 5 years we have hired a number of new producers, and that is something we will continue in 2010. We have hired people with varying degrees of experience, from college graduates to seasoned producers. There is business out there to be had from retailers, and we need people to service and sell that message for us.
We're also looking at our premium volume and identifying concentrations of premium. Insurance companies are looking to grow and we're looking at aggregating that premium into a facility of some sort rather than taking a broad-brush approach to writing business. Many carriers are interested in talking to us about certain targeted lines of business, so it comes down to knowing what we write and identifying opportunities within that field.
Kaufman: Besides the product lines I mentioned earlier, other opportunities in 2010 will be acquisitions, of both businesses and individuals. Consolidation will continue throughout the industry, and financially strong companies will make it by continuing to invest in IT and talent. We have made some acquisitions, and have a number of others still on the table. We're also acquiring talent; as companies consolidate and right-size, sometimes the best talent is looking for other opportunities. We have been selectively hiring and have found some great talent.
Anderson: I see opportunities in the D&O/E&O sector due to the abundance of financial meltdowns in the past 18 months. I see professional liability opportunities in the IT and healthcare industries. I see environmental opportunities continuing. I see personal lines, mainly homeowners and excess coverage, opportunities for the wholesale industry as large independent agency carriers and direct writers continue to pull out of areas with catastrophic exposures. I see property-casualty opportunities as loss ratios continue to increase. With the increase in consolidations in the standard lines insurance marketplace, and the flexibility and vast resources of the wholesale industry, I also see opportunities for wholesalers to do more standard lines business as consolidators.
Hutelmyer: As the economy strengthens, opportunities will increase. New ventures, energy-related business, green technology and construction will provide new risks in need of innovative product development and risk solutions.
Mastowski: Wholesalers have been resilient over the last 35 years. As opportunities arise for a new coverage or different approach to business, the wholesaler will adapt. The Internet will be opening up new opportunities for coverage. Information security and cyber-fraud will require specialty markets and wholesalers to create coverage that addresses such problems. Many wholesalers are doing business with admitted markets as companies realize it's a less expensive method of distribution. Companies call it aggregating. This may open additional opportunities for wholesalers to add more access to market for their clients.
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