As the Soft Market Continues, Calif. Wholesalers Seek Specialty Niches

March 10, 2008

Relationships with agents, brokers and regulators critical to CIWA members


The members of the California Insurance Wholesalers Association (CIWA) play a vital role in the state’s insurance market. To find out how wholesalers are faring in California’s increasingly soft market, Insurance Journal talked with Mark Scott, a board member and Legislative Committee co-chair for CIWA. Scott is CEO of TransCal Associates, an insurance wholesaler based in Sacramento, Calif.

First, Can You Describe CIWA’s Membership?

CIWA consists of about 70 California wholesalers and a like number of insurers and venders with whom we do business; our members vary in size and specialty. We have many “binding authority” intermediaries, as well as pure “brokerage” operations, ranging in size from large national firms to California-only smaller shops. In the aggregate, we estimate that the 70-odd CIWA wholesale members write in excess of $3 billion per year here in California.

How is the soft market affecting wholesalers?

The soft market has had some adverse effects on the wholesale distribution system. Wholesalers typically write business that’s niche and specialty business, or higher risk type accounts. As the market softens, yesterday or today’s specialty high-risk accounts become standard accounts. Standard companies have a huge appetite for business, and in a soft market they lower their underwriting standards. The only way standard companies can make their top line be what their stockholders want it to be is to write riskier and riskier business for less premium. The current market conditions are difficult because wholesalers, like everybody else, need to write more business to maintain our revenue stream. We’re not only competing with other wholesalers but also with the standard market trying to come in and poach that specialty business.

What are wome of the specific businesses standard carriers are going after?

They are writing the smaller commercial accounts that they would not have considered worth their time in the hard market. They are writing riskier commercial operations such as commercial auto, including truckers, some construction accounts and fire coverage in higher protection classes.

Are there any new opportunities for wholesalers in a market like this?

Yes, as the market softens and companies seek ways to find more sources of business, they are more willing to explore the wholesale distribution system as a market channel. That creates opportunities for wholesalers. The number of companies that work with us tends to increase and more programs are granted to wholesalers. Companies are looking for cost efficient and effective distribution channels, and for certain classes of homeowners and auto business or small business and niche commercial accounts wholesalers are the best way to get an insurance product to the marketplace. We write the business that does not fit into standard company underwriting parameters, like inner city buildings where fire coverage can be an issue because of older construction, or the $10 million to $20 million homes and the homes located in brush fire areas. That business is often overlooked by the standard markets.

Do your strategies for customer service change in a soft market?

We do try to make sure we can reduce the price on all renewals by shopping the business to any market we have. It’s a dynamic situation. Companies reduce their pricing very rapidly. They’re trying to keep the pricing down if they can so the retailer won’t move the account to someone with a lower price. Also, there is a theory that insureds have more insurance dollars to spend as the cost of insurance goes down. There may have been coverage they wanted in the past but couldn’t afford, such as employment practices liability insurance, earthquake or flood on their property policy, or higher limits of liability. When insurance costs go down, those coverages may become an option. It’s a little like going through the drive through at McDonald’s and getting the value meal and they ask, “Would you like an apple pie with that?” A lot of times people will say, “Yes.”

Where do CIWA members turn to find new opportunities in this market?

Trade association meetings, such as ones CIWA holds, are very important in providing opportunities to wholesalers as well as insurance companies. These meetings gather the players together and allow the wholesalers to bring ideas and programs to competing companies. Deals can be put together that are profitable for both.

Can you give a specific example?

In California, when a developer puts in a subdivision of homes, there’s a 10-year statute of limitation where a homeowner can sue for construction defect liability. An example would be if the subcontractor puts the windows in backward and the homeowner ends up having property damage to his carpet. This liability lasts for 10 years in California; in most other states, it’s two to three years.

Insurers here found they were having a huge spike in claims near that 10-year mark. What was happening was that law firms were sending letters to condos telling them that there was one more year left where they could collect. There were huge losses and it drove many insurance companies out and made others insolvent. There was a tremendous reaction among insurers as far as writing contractors.

However, we knew of a class of people who work in construction who had no construction defect liability exposure — the concrete pumpers. All they do is pump concrete from the truck to the foundation. But people wouldn’t write them, so we put a niche program together. We did our homework and showed that the pumpers were just delivering a product to the jobsite and didn’t have any exposure. The program was very successful — the rates were low and we had good availability. It was profitable for our companies and our commissions were good. Wholesalers all over the country are finding and developing niches like this.

California has been hit with fires, floods and mudslides in the past year. How does this catastrophe risk affect wholesalers?

The recent wildfires in California, as well as other past natural disasters, spotlight the need for the wholesale distribution system. Typically, in the aftermath of such events, the standard companies scrutinize their aggregate catastrophe exposure and “pull in their horns.”

The surplus lines industry, which almost exclusively uses wholesalers, is able to step in and provide coverage in these areas. In this way, CIWA members act as a “safety net.” The London markets, many of whom are CIWA members, continue to be a huge player in the catastrophe reinsurance market in the Golden State.

Can you explain the issue surrounding brokers’ fees in California?

The problem is that there are no regulations or laws that specifically deal with broker fees. The DOI took the position that all charges made in the distribution of insurance are premium. California is a file-and-approve state, and you have to use the same rate schemata on every account you write. So they said it was unfair discrimination if you had two insureds and one went to a broker that charged a fee, and one didn’t.

We’re saying not so fast. That if the broker is doing his job, the broker went to three or four other companies to find the best deal and when you’re getting competitive quotes from several companies you’re not working for those companies.

The key is disclosure — telling the insured what you’re going to do and what you’re going to charge and why. Most business owners don’t know much about insurance and don’t want to know. They want their broker to be their business partner.

This issue is one Commissioner (Steve) Poizner inherited from the previous commissioner. Poizner himself has said that when he was running his own business before he became an insurance commissioner that he considered his insurance casualty broker his partner and that he felt paying a broker fee was just. Poizner is trying to get everyone together to work out this issue either with new legislation or regulation under existing regulatory law.

Is there any other legislation in the state that concerns your members?

There is currently no legislation on our “radar screen” that concerns us, but as the session progresses, I’m sure that will change.

Topics California Legislation Agencies Excess Surplus Pricing Trends Market Construction

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