Getting the Percentages Right in Surplus Lines

I was standing at the ballpark watching the local minor league baseball team take batting practice before a game. My son was along for the insurance company-sponsored evening, and we were out along the third-base line in the area reserved for large groups. As we got in line for free food, I came upon all of my friendly competitors and engaged in friendly introductions as we moved through the line. After a while, we were just waiting silently for our turn at the food table when I overheard one agent talking to another. He was busy bragging that his agency produced more than $500,000 in annual income and had less than three percent of that income with general agencies within the surplus lines market. In between overcooked burgers, potato salad and baked beans, I couldn’t help but think of my own situation and volume with general agencies.

I wasn’t sure if three percent was good or bad. I had several multiples of that percentage in my own agency and things seemed to be progressing quite well. That number was dramatically reduced from my first few years as an agency owner. When I worked for other agencies, I wrote 20-30 percent of my business in the surplus lines market. I thought having a surplus lines license was just another part of my general lines license. I had started out trying to make relationships with as many general agencies as possible. I wrote coverage for taxi cabs, which was a somewhat problematic business to say the least. The cab owners would come in and pay with pennies while dressed in gym shorts from the 1970s. Eventually the stench of the collection overcame the sweet smell of the commissions. Furthermore, I wrote coverage for environmental consultants, hydroelectric plants, travel trailer manufacturers and even a guy who owned an old Army surplus tank he used in car-crushing exhibitions.

Looking back, I see that as I got started in my own agency I would write anything that paid a commission. I developed relationships that added income to the business but did not add enough to justify maintaining. Over time I sold more mainstream insurance and less surplus lines business.

Changing relationships
Then, at an Independent Insurance Agents of Idaho (IIAI) Education Convocation, I attended a seminar titled, “Understanding the Wholesale Broker.” The experience changed my relationships with all of the general agencies that had got me started. I got rid of a lot of the poor-paying, low-commission, and high-maintenance accounts. I got to know people on a personal basis at Swett Insurance Managers—my local surplus lines broker—and tried to develop that relationship. I tried to learn which products they had access to and how that could add value to my business relationships with clients. I thought that I needed to find a way to add value to my relationships with clients; in other words, give them something other than a bill each year. I found that understanding the products available through the broker allowed me to provide that value when explaining coverage or endorsing the insurance contracts for my clients.

While eating my burger at the ballpark, I thought that there must be many different business models that can lead to success. The success I have enjoyed is in no small part due to my relationships with the individual brokers at the local surplus lines office. The friendly competitor with no surplus lines business may have a very good business, but so do I. I have a good agency agreement that was reviewed by IIAI Legal. Both sides are equally protected by hold harmless/indemnification agreements as well as error and omissions insurance. The payment terms are well-documented and set forth on each individual premium indication. The commission also is set forth on each individual premium indication. Most importantly, the coverage restrictions and policy forms (exclusions) are referenced and can be attached to the proposal if necessary.

We have become comfortable in this relationship and it has led to our comfort within our marketplace. We write two or three pieces of new business and renew several others each week in the surplus lines market, 99 percent of them with Swett. Most new business comes through referrals from other clients. Having a general idea of cost, what is necessary to obtain the premium indication, and an idea of the time frame for binding coverage allows us to operate efficiently while discussing new business with potential clients. The use of complete applications, a good narrative, access to the client’s Web site, and electronically merging and transmitting applications have greatly improved our operating efficiency within this marketplace.

The pay off
Today, standard markets are non-renewing entire classes of business, premiums have increased as much as 100 percent, and a lot of standard business has suddenly become surplus lines business. That business relationship I spent all of these years developing is really paying off. Our frequency of writing new business already elevates our position with these brokers. Having knowledge of what the broker needs to provide the indication and supplying that to them—complete, the first time—allows our submissions to float to the top. We get our premium indications back in a timely manner, which allows the new client relationships in this tight market. The markets often make the placement of coverage more cumbersome than desired. Having knowledge of and asking for copies of attached forms often helps the clients decide which policy most suits their needs.

Smaller contingencies from the standard markets can be overcome by higher commissions from higher premiums in the surplus lines market. Areas of exposure that are not covered through the standard marketplace are best covered in the surplus lines market. Using this marketplace to supplement and complement the other coverage placed with a client reduces E&O exposure, increases income and, most importantly, provides that coverage the client wants to purchase or complete their risk management plan. So with all the options and business models available to agents, I think one would be foolish to overlook the potential of the surplus lines marketplace.

Thinking back to my friendly competitor, I am glad I have more than three percent of income from clients derived from the surplus lines marketplace. All of my big accounts have at least one line of coverage outside of the standard markets. As an agency we have grown and been profitable every year for the past 10 years. The model seems to be working. I’ll stick with it.

Doug Colwell is a principal at Harris-Dean Insurance—a mid-sized agency with a large book of commercial insurance—based in Boise, Idaho. Colwell is a former president of the Independent Insurance Agents of Idaho (IIAI) and an agent spokesperson for the Independent Insurance Agents & Brokers of America (IIABA).