Dispelling the Myth That Wholesalers Add Cost

By David Pagoumian | February 21, 2010

Your current retail broker is using a wholesaler and it’s adding to the cost of business. We can reduce your costs by eliminating the wholesaler.” How many times have retail agents and brokers said this when making a sales pitch to a prospective new account? It’s not uncommon, as retailers hunt for new business. The problem is the statement is both misleading to the buyer and out of touch with today’s marketing realities.

Let’s dispel the myth: Using a wholesale broker does not increase the cost of the insurance transaction to the insured.

The idea that wholesalers add cost to the placement is inherently flawed. One only needs to “look under the hood” of a program and brokerage relationship to see if an intermediary is truly adding cost or adding value. Wholesale brokers that create client-relevant excellence through competitive pricing, coverage optimization and service enhancements add tremendous value without adding cost.

Look at how wholesale brokers are compensated. The insurance company pays retail brokers based on commissions, and depending on the retailer’s compensation arrangement with the insured (commission from an insurer or fee paid by the insured), an agreement between the wholesaler and the producing retailer (working as a team on behalf of the client) determines how the commission or fee will be allocated. In many cases, the total commission paid by the insurer can be the same, regardless of whether a wholesale broker is involved. Some carriers pay a higher commission percentage when a wholesaler is engaged, but that is because the higher commission is more than offset by the carrier’s lower distribution costs.

A wholesale broker brings value by providing additional market access. This assists the retail broker by providing greater pricing leverage against the retailer’s direct markets and vice-versa. The result is premium savings for the insured.

By relying on wholesalers, carriers avoid the cost of operating a large retail network. By working with wholesale brokers who are experts in their field, underwriters can be more productive and efficient because of the quality of risk data in their submissions and the likelihood that the risk presented will be an appropriate match for their underwriting appetite. The insured incurs no additional charge by using the services of a wholesale broker — and has access to the benefits of superior market knowledge and placement expertise.

The Value of Partnerships

Retailers, by establishing partnerships with wholesalers, can provide in-depth knowledge, broad market reach throughout the global marketplace, strong relationships with underwriters and familiarity with the insured’s needs.

Wholesale brokers not only offer expertise in particular lines or classes of business, they also offer the advantage of sophisticated technology to evaluate risks and access to markets that would otherwise be out of reach. This generally produces the most favorable policy terms and conditions available, while minimizing cost.

Specialized hard-to-place risks — such as high earthquake, flood or hurricane exposures — will benefit from increased competition created by marketing to diverse carriers.

On large, complex accounts requiring multiple insurers, wholesale brokers can be instrumental in program design, identifying and quantifying risks and exposures, and having the ability and expertise to syndicate among many insurers. Wholesale brokers also earn a role on the placement team through their use of structured data analysis and market intelligence. In today’s climate, insureds are more frequently initiating request for proposals (RFPs) and insurance buyers are becoming more involved in the wholesale selection process. As such, retailers who want to effectively compete in the RFP process will routinely invite their entire team, including the wholesale broker, to participate in the RFP response.

A Winning Team

A retail broker is like a cardiologist who consults with other specialists to ensure customers get the best quality care, especially in complex, unusual or time-sensitive situations. Those who are unwilling to call in a specialist — the wholesale broker — could be denying their clients the best available expertise and coverage.

A strong insurance placement team that includes a wholesale broker will secure the best insurance coverage and the broadest terms for the most attractive price. The retail broker that takes a long-term, strategic view on how to best meet the needs of insurance buyers, solidifies client relationships, improves retention, attracts new clients and ensures a clear path to continued success.

Topics Carriers Agencies

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