By George Rothert

Working With Your E&S Wholesaler: Be Nice You’ll Need Them Again!

The surplus-lines industry pendulum is now on its backswing into a soft market. A couple years of market restriction and firm pricing brought a temporary prosperity to the industry. The so-called “standard” markets shed their under-priced business-along with much of their good business-creating a bonanza for surplus-line carriers. As the industry has shown time and again, it can’t stand prosperity. So the standard companies are enlarging their risk appetites and pressuring prices downward.

A recent survey by Lehman Brothers Equity Research shows that in the first quarter of 2005, prices for large commercial accounts on average are 10.6 percent lower. Small accounts are averaging 6 percent reductions. While this does not apply to all classes and all coverages, the trend is clear.

The result is inevitable. The only unknown is how long will it take. At least this will provide many spirited discussions for industry insiders and observers.

Regardless of the above, the surplus-line industry will survive the coming soft market. As A. M. Best’s annual report on the surplus-line industry shows year after year, surplus-line companies in general are stronger financially than the standard companies. Underwriting discipline has its rewards.

The character of E&S wholesaler as intermediary between the retail producer and the insurer has two roles: as a managing general agent or as a broker. Sometimes these terms get used interchangeably. It may be helpful to clarify the distinction.

A managing general agent has contractual authority with insurance carriers to underwrite and bind business and also to issue policies. The MGA considers the best interests of all parties, but ultimate responsibility is to the insurance carrier. The MGA can handle the entire transaction in-house.

This authority has parameters, which can vary from company to company. Limits of liability, premium size or certain classes may require the wholesaler to obtain approval from the carrier before releasing the quote. The MGA can usually confirm binding immediately and often issue a policy number with the confirmation.

When an intermediary acts as a broker, there is no authority from the insurer. The broker’s purpose is to see that the submission is complete and accurate, then, using knowledge of the marketplace, obtain the best terms-coverage as well as price-from the best available insurers. A broker’s end responsibility is to the retailer on behalf of the applicant.

Many wholesalers operate primarily as an MGA or as a broker. Many offices have departments for both. (Some E&S insurance companies also operate departments for both.)

Work with fewer wholesalers

Many successful retail brokers strongly believe they do better by working with a limited number of E&S intermediaries. No one firm can do everything for an agency. Different wholesalers have different strengths and different markets. Working with fewer wholesalers results in a better knowledge of whom they’re working with. It also results in the wholesaler better knowing the retailer. The intermediary will be more inspired to produce a competitive quote with the knowledge some effort will be made to sell it.

When a wholesaler knows the information furnished by the retailer is true and complete he is more inclined to offer the best terms possible. On the other hand, there is not much enthusiasm when the E&S broker knows the submission has been sent to all his competitors and the retailer will go with whatever quote is $100 cheaper than the others.

Tell the truth, the whole truth

It bears repeating: if your wholesaler knows what you submit is truthful and complete, you’ll get a quicker, better response. Accurate numbers for payroll, sales, cost of hire, area, et cetera are obviously necessary for determining GL premium and sizing up scope of risk. It will also spare grief at audit time.

Underwriting property coverages requires age of building, updates to building components, adjoining occupancies, protection class and distance to hydrant, type of construction and roof. These may seem obvious, but are often missing from applications.

If an account has suffered losses, explain them and tell what, if any, loss-control measures have been taken. Otherwise, the underwriter’s viewpoint is of a risk that will have losses.

Give a complete description of operations. If applicant has a Web site, provide the address. The application’s description of operations should match the applicant’s claims on the Web site.

Disclosing pricing needs and wants is helpful. If you have a quote for $12,000 and your wholesaler knows that can’t be beat, it will save time on both sides.

Write legibly

Yes, most apps come off agency management systems and more are being sent electronically, but many are still handwritten. Underwriters don’t like to guess; don’t make them decipher handwriting.

Time

The more, the better, especially on complex accounts. If you establish this pattern, when you need a RUSH, they’ll know you really mean it and respond accordingly.

Pay promptly

E&S brokers are in the insurance business. Time and effort spent trying to collect money is time and effort not spent on placing insurance. Collecting money before ordering coverage is a good idea, as policies from E&S insurers generally have hefty minimum-earned premiums and “flat cancellation” is usually not in their vocabulary.

What you should expect from your E&S wholesaler

Response-If it’s a simple risk and fits inside program parameters, you should get back a quote right away. If it’s more involved, the intermediary should keep you informed on markets approached and progress made. In turn, you should provide any new information on applicant. If they have no market, they should tell you immediately. Return premiums should be handled in a timely manner, also.

Financially-strong insurers-The retailer/wholesaler relationship is built on trust. But verify.

Full disclosure of terms, including exclusions-Risks rejected by standard markets can often be written by surplus-line carriers because certain exclusions are applied. You should be told what they are.

Copies of forms-Your wholesaler should be able to provide you with any policy form with which you are unfamiliar.

Supplemental applications-The norm these days is to find them on the E&S broker’s Web site.

Consistency-Even in the hardest of hard markets, the wholesaler should treat you respectfully and show appreciation for your business.

Hard market or soft market, there likely will always be risks that don’t fit the appetites of the regular markets. Maintaining good working relationships with professional E&S brokers is still important to an agency’s marketing strategy.

George Rothert currently serves as president of Santa Rosa and Oceanside Calif.-based George Rothert & Assoc. (www.grothert.com), and president of Sherwood, Ore.-based Pacific Coast E&S (www.pacificcoastes.com). He is also co-owner of Seattle-based Petersen Rothert (www.petersenrothert.com).