How to Use Alternative Markets

The “hard market” conditions have been gone now for a couple of years. So, usually during “soft market” conditions one expects a lot of competition from the standard markets. This, however, is not the typical soft market of the past.

The soft market crept into various parts of the country in a few select sectors of the insurance market. It showed up more as “not hard” rather than “soft.” For some lines of insurance in certain places premium prices went down yet competition did not open up significantly. It seems now the opening of competition is more prevalent across the country and across the various lines.

Generally speaking, in soft market conditions, the consumer benefits with lower prices and more choices. On the other hand the agent and the companies get hit with lower profits and more work. The alternative market might get hit even more since the standard market carriers will start to take on risks they would not consider during the hard market cycle. These were the risks that were placed with the excess and surplus or managing general agency (MGA) markets.

Does this mean the E&S market and MGAs will fade away? No! The E&S and MGA community have many bright and talented people that know how to react and adapt to changing market conditions. It is the agent/broker that needs to be refreshed on how to best exploit the current market conditions for clients.

What are MGAs and wholesalers?

Regardless of the name, E&S brokers, wholesalers, general agents (GAs), managing general agents (MGAs), 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.

As alluded to earlier, in a “hard market” the wholesaler is often an important player and can even save the day for an agent/broker. In a “soft market” they still help out by placing the difficult risks or program type business.

When these markets are properly used the client benefits since the insured will have greater access to better products. It often works best when the wholesaler is treated as an extension of the retail agency’s marketing department and can act as a partner in risk placement. The agency benefits by keeping the account and adding to the bottom line.

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 the handling of claims. They will have access to both admitted and nonadmitted carriers and may even have underwriting authority.

When to consider a MGA

The obvious time to use alternative markets is when a standard market is not available to write a particular risk. 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 a 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 a wholesaler. First, the MGA has very specialized knowledge of the marketplace. Taking on difficult or unique risks is their job, so they have daily exposure as to who is writing what risks and what is going on in the reinsurance market.

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 can interpret policy terms and conditions. All this can help save the retail agent time and money.

How to select a wholesaler

Many agents/brokers get complacent while working with their clients. Some good advice to follow is to always be curious and seek out new ways to help the client.

When placing a risk, check out all the agency’s markets and beyond. This does not mean one needs to make a submission and get a quote, but rather, do 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 wholesale broker’s reputation, financial integrity, overall stability, and ability to deliver products and services. See the checklist below for some of the key items to review prior to selecting a MGA as a market.

How to work with a MGA

For small and uncomplicated risks typically only one wholesaler 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/MGA/E&S broker that discretion is always important. Ask each broker which markets they will be contacting. Let them know of the markets that have already been contacted in order to avoid any unnecessary duplication. Otherwise, there is always a chance that an insurance company underwriter might receive the same submission from more than one source. This could then lead the underwriter to feel that since the submission is being “shot-gunned” they should not waste their 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 for everyone and adds credibility to the retail agent.

Build strong relationships with key individuals at 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 it will be that the broker will place a risk at the last minute.

Housekeeping rules

Before any “alternative markets” are approached, it is imperative that the producers and owners understand the coverage on the retail agency’s own errors and omissions policy. This applies to especially those setting up captives, risk retention groups, as well as those accessing the E&S market. Activities outside of the norm might be excluded from coverage on a basic E&O policy.

Also, 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. A professional insurance producer needs to have as many arrows as possible in his or her quiver. “Knowing” the answer will block true understanding of the client’s needs. Some good advice to follow is to always be curious and seek out new ways to help the client.

Explore the use of alternative markets as a regular part of doing business. By providing more and better choices for the client, an agency will be in a great position regardless of market conditions.

Bill Schoeffler and Catherine Oak are partners
at Oak & Associates. The firm specializes in

financial and management consulting for inde
pendent insurance agents and brokers. They can

be reached at (707) 935-6565, by e-mail at
bill@oakandassociates.com, or visit:

www.oakandassociates.com .

[

Topics Agencies Excess Surplus Market Insurance Wholesale