Managing Large Property Placements in a Hardening Market (The Wholesaler's Perspective)

The insurance market ebbs and flows between a 'hard' and 'soft' market.  In a soft market, prices tend to ease and more capacity is usually in the market.  This capacity needs to be put to use and trying to earn a return for investors, so the flow of capital tends to push premium pricing down.  In a 'hard' market, insurance capacity becomes more scarce and prices tend to rise.  On large property placements that require large limits in catastrophe prone areas (say, greater than $200 million), the problem becomes finding the capacity to fill out the placement at a reasonable, or sometimes 'any' price.  Even with one broker in the market with all of the insurance carriers to choose from, it is often difficult to find sufficient capacity to fill out a placement.  In a hard market, many viable carriers who would once put up large limits may only be willing to supply $2.5mm to $5mm.

The major problem occurs when consultants and retailers employ multiple brokers to fill out their insurance placements.  Often there will be a 'market assignment' where consultants and retailers allow brokers to approach only a few markets.  Unfortunately, in a hardening market, this approach just doesn't work since neither broker will be able to have enough companies to fill out the capacity a risk might need.

Think of your property insurance placement as trying to fill up a bucket with water.  Say you have a 10 gallon bucket to fill, but want to make sure you get the cleanest and cheapest water.  You employ two water brokers to fill your bucket who go out to find the best water for your bucket.  You told each broker they can only approach 3 specific stores to find the water, so they contact their best people at the stores to get the water for you.  The stores are running low on water and can only offer 2 gallons each.  They may be able to offer another gallon at each store, but that additional gallon is going to cost a little more than the other two since water is scarce and others need it too.  Now you have two brokers with 6 gallons of water each, with the potential of offering up to 9 gallons at a higher price.

This is the same thing that happens in the insurance market; you will end up with is a suboptimal insurance placement with less capacity than you need at, more than likely, a higher price than you would have paid had you let one broker work the entire market for you.

If you find you have to have a bidding process, an intelligent solution may be to have two or more brokers work on the 'primary' piece of the placement, say, the first $5mm for you.  Review quotes from each broker and choose a winner.  At that point, grant access to the entire market to the winning broker to put together the optimal placement for you.

The fact is there are only so many puzzle pieces in the insurance market to choose from.  If you want to put together a program where all of the pieces fit nicely and present one clear picture, then one broker needs to be able to work all of the markets they have.