How to Use Surplus Lines Brokers and Managing General Agents
Recent estimates show that about one third of all commercial risks in the United States are placed in an “alternative market.” As producers already know, many general accounts no longer can be placed through the standard markets.
So, what is this alternative marketplace that attracts one-third of the $350 billion in commercial premiums?
Since there is no formal definition, it is typically assumed to refer to tools or outlets that act as a substitute for traditional risk sharing products offered by standard insurance companies.
Most agents and brokers are very familiar with the wholesale, excess and surplus (E&S) lines markets, which are the staple of these alternative markets. However, alternative markets could include captives, risk retention groups, purchasing groups or more exotic solutions such as financing transactions like alternative risk transfers.
The growth of alternative markets has been at a rapid and steady pace for the last 50 years. Program business that developed in the 1960s led to the growth in managing general agencies (MGAs) and wholesalers. MGAs have experienced a couple of boom and bust periods in the 1970s and 1980s, especially in the hard market of the mid-1980s.
Why, when and how should a broker consider an alternative market? The role of an insurance broker is to educate and advise clients of their options. So, the broker needs to first know what options are available. For some large businesses, exploring self-insurance is a viable option. However, for the typical business, the lack of a standard market might be resolved with the help of a good MGA. The focus of this article will be on the more common alternative market vehicles, such as MGAs.
What are MGAs and Wholesalers?
Regardless of the name — E&S brokers, wholesalers, general agents, managing general agents — all function as distribution channels that find coverage for difficult risks at the best terms and conditions that are currently available in the marketplace. For simplicity, in this article all these distribution channels will be called MGAs, unless otherwise noted.
Today, there is also a growth in aggregators, which are firms that typically provide access to standards markets to new or small firms that do not have enough volume to get their own appointment. Aggregators have taken on the role that some general agents and MGAs did in the past and are still doing, so there is a blurring of definitions.
In a hard market the MGA is often an important player and can even save the day for an agent or broker. In a soft market MGAs still help out by placing the difficult risks or program business.
When these markets are properly used, clients benefit since they get greater access to better products. The use of MGAs can help retail agencies keep accounts they would otherwise lose. It often works best when the MGA is treated as an extension of the retail agency’s marketing department and can act as a partner in risk placement.
The services provided by MGAs will vary. Some are more service-oriented than others. Typical services provided include quoting, binding coverages, issuing policies and sometimes even claims handling. They will have access to both admitted and non-admitted carriers and may have underwriting authority.
When to Consider Using an MGA
The obvious time to use alternative markets is when a standard market is not available. It is the nature of the MGA business to get submissions after standard markets have looked at them, sat on them and then declined them. However, keep in mind, if the account is unique and can fit into a program, the insured might receive better service through a specialist. For example, a standard market might write mobile homes, pizza shops, summer camps or antique cars, but an MGA might have a very competitive program for these and other risks.
There are several other big reasons why an agency should consider working with an MGA. First, many MGAs have specialized knowledge of the marketplace. Taking on difficult or unique risks is their job, so they have daily exposure to who is writing what risks and what is going on in reinsurance markets.
Since many of these firms specialize in certain risks, they can also offer technical expertise that can assist in the sale of their products. The underwriters will have an in-depth understanding of coverages and be able to interpret policy terms and conditions. All of this expertise can help save the retail agent time and money.
How to select an MGA
Many agents and brokers get complacent when they should always be curious and seek out new ways to help clients.
When placing a risk, check out all the agency’s markets and beyond. This does not mean making a submission or getting a quote, but rather, doing the proper due diligence. Investigate the standard markets and the alternative marketplace. As with qualifying any standard market, the retail agent needs to be confident in the MGA’s or wholesale broker’s reputation, financial integrity, overall stability, and ability to deliver products and services.
How to work with an MGA
For small and uncomplicated risks typically only one MGA should be considered. However, as the risk becomes more complicated and the need for creativity increases, it may be prudent to utilize more than one wholesaler.
Keep in mind when approaching more than one wholesaler broker or MGA that discretion is always important. Ask each MGA which markets they will be contacting. Let them know of the markets that have already been contacted in order to avoid unnecessary duplication. Otherwise, there is a chance that an underwriter might receive the same submission from more than one source. This could lead the underwriter to believe that the submission is being “shot-gunned” and that he should not waste time on it.
In general, it is best to let the underwriter know what it will take to get an order. If there is a target premium, let the MGA know. This saves time and adds credibility.
Build strong relationships with key individuals working within the MGA’s office. A relationship built on trust, professionalism and past performance will make the placement process much easier. The stronger that bond is, the more likely that the broker will place a risk at the last minute.
Housekeeping Rules
Before approaching any alternative markets, it is imperative that producers and owners understand the coverage provided under the retail agency’s errors and omissions policy. Activities outside of the norm might be excluded from coverage on a basic E&O policy.
Also, it is important to understand the local rules and regulations on using alternative markets. Find out what needs to be disclosed and how to do it. If necessary, can the agent/broker add a broker fee to the policy? Is a surplus lines license required for creative alternative markets, such as captives and risk retention groups? These rules will vary from state to state.
A Final Thought
Don’t be complacent when working with clients. Professional insurance producers need to have as many arrows as possible in their quivers. Always be curious and seek out new ways to help clients.
Explore the use of alternative markets as a regular part of doing business. By providing more services and better choices for clients, an agency will be in a great position regardless of market conditions.
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