As retail brokers struggle with the declining revenue of a continuing soft market, they are engaging in some activities that frustrate their wholesalers, according to E&S brokerage 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 come back in and take over certain 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," he added, when pressed further for possible proactive steps that wholesalers are taking to curb such activity.
"I call it 'customer euphoria,'" he said. "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 added.
Scott Smith, president of S.H. Smith & Company in Hartford, 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 that his firm does. "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 cannot 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 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 in 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.
MORE NOISE
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," he added, noting that many are just looking to get coverage to satisfy a third party–a bank relationship or an equity relationship, for example.
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 new entrants every day," 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.
If an agent has $10 million that is currently in the E&S marketplace that really belongs there, does the retailer really need 50 brokers to get there? he asked, rhetorically. "Our answer is no. We represent every market there is. We have the expertise to place the risks well. So why have all these wholesalers calling on you, making a lot of noise?"
Some agents understand that message, but others are just always afraid that there's going to be something out there to which they won't have access, he said.
Mr. Smith said he is not worried about the startups but instead sees the proliferation of wholesalers as a source of frustration and confusion to retailer brokers.
"I see all of the investment that I put into people at S.H. Smith. And we go and we have a quality 30-minute conversation with an agent. After we leave, the agent meets with others"–not just the new startups but representatives of some very old firms as well, he said, describing these as "wholesalers that are hanging on by their fingernails because they haven't been able to keep pace with the marketplace, or they can't afford necessary infrastructure changes or adequate E&O coverage."
Mr. Smith said that when he talks to good-sized agents, they know who their 12-to-15 standard markets are. Then they look at the alternatives for placing business, and there is something like 100 wholesalers.
"Something has to give," he said, suggesting that in the meantime, a key challenge for the wholesale brokerage community is getting the messages of quality and value out amid all the noise.
Related Article:
Although new startups may create frustration and confusion for retailers, Mr. Smith, Mr. Pagoumian and Matt Nichols, president of All Risks, Ltd., see opportunities for their firms arising from the launches and mergers occurring around them. Their views on this subject are presented in the cover story of the Oct. 11 edition of National Underwriter magazine.
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