Who is in Control of the Insurance Placement? A Case For Using One Retailer and Multiple Wholesalers

As an insurance wholesaler myself, it might be strange for me to make a case for using multiple wholesalers in your property placement, but I actually think it might be a good thing.

The person in control of the placement is going to determine how well it's going to be placed.  There are really five possible scenarios for control of a commercial insurance placement, and that is with the insured, the retail agent, a consultant, a wholesaler or I suppose in very rare cases that I can't think of at the moment, the insurance carrier.  The one with control over the placement, should also be the most knowledgeable and have the power to move any pieces of the placement around at will.  It also may be obvious that the one with the control over the placement should be closest to and trusted by the insured.

The worst case scenario.  The worst thing that can happen is for an insured to employ several insurance agents with the hope that they will scurry around the market to present them with the best possible deal.  I mentioned in this earlier post that the commercial property market is limited in capacity and underwriters (it's a very small world out there), and breaking up the market among many 'shoppers' will lead to a suboptimal placement.  This type of tactic may work with buying life insurance or cell phones, but it doesn't work in commercial insurance (see my post on blocking to find out more).  In the scenario below, there are two different retailers using two different wholesalers who have secured the carriers shown.  Suppose the ideal theoretical placement would be with carriers F, B, L & Q (shown in green).

This would lead to the best possible terms in the market at the best possible price.  Of course, it is extremely rare that we know this because all of the markets are vetted.  Unfortunately, each wholesaler only has the ability put together a placement with the carriers they have and present that to the insured.  In this case suppose the wholesalers present these two placements:

Although each placement would work, neither one is ideal.

A better scenario.  If an insured believes that multiple parties need to be involved to 'keep the others honest' and make sure their placement is the most competitive, then it makes more sense to split up the market at the wholesale level, not the retail level.  Why only one retailer?  Because it would be like trying to build a house with two general contractors in charge; a very confusing mess.  You can however, use more than one wholesaler.  In the house-building analogy, the GC can go out and buy materials from any number of suppliers, but you as the home buyer need to make sure they know how to put it all together effectively.  Of course, your insurance retailer needs to understand how to layer programs effectively and can control gaps that might occur between layers.  A savvy, knowledgeable retailer can direct the traffic in the market and ask for specific parts of the placement with specific terms depending on what others are doing in the market.  If the retailer has chosen the right wholesale partner, then they will offer new ideas on how to structure the placement as well.  In this scenario, Retailer A has the ability to direct traffic and put together the idea placement.

A consultant can also be added between the retailer and insured as long as only one retailer is still involved in larger placements.  Be careful since consultants may try to pit retailers against each other which may yield a suboptimal result.

The Small World of Commercial Insurance - How Blocking Works

It happened again this week.  An insured trying to find insurance for a relatively small ($11 million in value) mixed-use commercial building on the Florida coast.  He asked two different insurance agents to help him find insurance.  This kind of risk is definitely going to be placed in the excess and surplus insurance market requiring a wholesale broker to assist them.  Each agent sends the risk information to their favorite wholesale broker who types up a submission letter and sends it out to the insurance carriers who will most likely be interested in writing their insurance.  There are probably only five or six insurance carriers who would have an interest in writing this particular risk, and both brokers approached all of them.

So, what happened to this risk when the insurance carriers got it from two different brokers? The broker that sent it first will be 'clear' and can work with the carrier to negotiate terms.  The broker that sent it in second will be 'blocked' by the first broker and receive a declination letter.

Only one broker can work with one insurance carrier at any time.

In an uncontrolled insurance placement like this, the wholesaler or agent that gets out to the market the fastest can get to the carriers first and be able to secure quotes.  What is ironic about this is the fact that a wholesaler who spends time with the submission to make sure it is of the highest quality and a 'top-of-the-stack' submission will actually get penalized and blocked out of markets by the wholesaler that just 'hits forward' on his email to the carriers.  This will be a post for another time.

So our building on the beach was quoted by a couple of insurance carriers with rate increases to what the insured was paying last year (the market is now hardening).  The insured, irked by the increase in premium, asked the other agent if they can improve on what they have.  In order for them to look at it, they will need a 'broker of record' letter or BOR that will allow the wholesaler that was blocked to negotiate terms on their behalf with the insurance carrier.  Once the 'second' wholesaler clears the markets (in this case, it was me), they will be able to present the quotes the current company already provided.

I found fairly competitive quotes, but unfortunately, just because I'm now the broker versus my competitor doesn't mean the price is changed.  I'm basically taking over the quote from the other wholesaler.

Some insurance carriers will even quote the risk for both brokers if BOR letters begin going back and forth. I think this is a great idea since it allows the insured to focus on the relationship part of the business versus just the lowest quote price.

So, for the insured, what is the advantage of going with one agent and one broker over another?  That is a long answer that I'll try and cover in future posts, but it centers on who is being the most creative with the puzzle pieces in the market and how to put them together, who is the most responsive to your needs, and who you enjoy working with.

The Property Market Is Hardening

Please make sure you prepare your clients.  Property is going to get harder to place over the next 18 months as capacity diminishes.  You are going to require more markets to build the same capacity for your placements.  Underwriters are going to start seeing more business and will have much less time on their hands.  Make sure you have good, quality submissions that get to the point of what you are trying to do.  You may only have the attention of the underwriter for a few moments before they move on to the next deal.  They are going to work on the easy ones with the information and opportunity to bind.  There are going to be more layers, and potentially more gaps, in your placements.  Make sure you review them thoroughly and really check for gaps that might open your placements up to more savvy competitors that find them when you're not looking.  Good luck out there!

Why Vertical is More Successful than Horizontal

'Horizontal' means more general and can do everything.  If you are a 'horizontal' wholesale broker, you'll be known as the jack of all trades or a generalist.  This is typically how wholesale brokers start out in the business as they try to find their footing, at least in my limited experience, this is what I've seen.  Horizontal is good and almost necessary if you have not found your passion and you have not really figure out what you 'want to do when you grow up'.  The problem with horizontal, though, is that it's rare to be successful in this day and age while trying to do everything because it's so easy to find the guy who is the expert at the one thing you need.

'Vertical' on the other hand means a deep focus on one thing.  A vertical broker will focus only on 'property' or more specifically 'wind-exposed property in South Florida'.  Or you may have a broker that only focuses on 'casualty for contractors in New York.'  If you are that person that is known to be an expert in your niche and it fuels your passion, then you have the start of what Jim Collins calls the 'Hedgehog Concept'.  'Vertical' works well for a wholesale broker because they have the volume of targeted business to put into the market and can build relationships around this business.

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.