Wholesale: More Special Than Ever

Everyone loves the wholesale insurance business these days, or so it seems.

“We’ve seen the entrance of a lot of other people coming into the wholesale market – aggregators, brokers, agents, program managers and administrators – all transacting business on a wholesale basis,” says Bernard Heinze, executive director at the American Association of Managing General Agents (AAMGA).

Heinze’s group has seen the trend and decided to embrace it. AAMGA had planned to change its name to the American Association of Wholesale Insurance Professionals (AAWIP) but that is no longer the case. Its well-established name, AAMGA, will not change.

But AAMGA’s membership will.

For years, AAMGA membership has been limited to managing general agents, national and international insurers, stamping offices and business services. Over the past two years, the organization undertook a strategic review, looking at what’s happening in the wholesale marketplace and what impact the association might have in advancing the market, according to Heinze.

As a result, the group’s membership is being opened to those working on a wholesale basis – surplus lines brokers, managing general underwriters, program administrators, program managers, aggregators and other wholesale entities. (See page 34)

Heinze says the purpose of inviting the wholesale market into the organization is two-fold: to improve the depth of intellectual capital in the wholesale business and to deliver more productivity in the industry.

The markets are changing right now, according to Danny Kaufman of Kaufman Financial Group, a global specialty insurance group, and that means a growing need for wholesalers right now.

“A lot of standard markets are scaling back, so I think we’re going to see a lot of agents needing wholesalers more now than they have in years,” Kaufman says. “Their direct contracts aren’t going to be as valuable just in terms of what they can put into them.”

That’s where wholesalers can capitalize on the market, he adds. Because appetites are changing in those direct relationships, retail agents will be forced to go to the wholesale market a lot more than they have.

“Part of that is because those standard companies were writing risks in the past few years that they traditionally weren’t writing or should not have been writing,” says Kaufman. “As the market is turning, they’re moving off those risks.”

Specialization Need

At the same time that the wholesale segment is becoming more popular and more entities are hopping into it, it is also becoming more of a field for specialists. Wholesale brokers are capitalizing on the demand for more specialization.

Heinze says the financial crisis in 2007-2008 and the softening market forced the wholesale insurance industry to rethink its business strategy and find its core capabilities. Wholesalers came to recognize that one of their key strengths is their specialized knowledge of markets and industries.

Richard Kerr, CEO of MarketScout, a large U.S. property/casualty specialty insurance exchange that itself started a wholesale unit a few years ago, says wholesale broking is experiencing a “resurgence” especially among those who are specialty product providers, and that the most successful intermediaries are those with a specialty expertise. Kerr says that the term “wholesale” broker is limiting because people really need to be “specialty intermediaries” in order to be successful.

Kerr says the general wholesale broker in the past would handle more general business risks, such as transportation or inland marine, and would seek out the specialized products to cover the occasional hard-to-cover risks such as lost shipments, when needed. There was no in-depth expertise.

“There will always be generalist wholesale brokers but the folks who make the big bucks are specialty intermediaries with specific skills in a defined coverage or industry group,” says Kerr.

He says wholesale brokers have employees with technical expertise and market relationships that the retailers don’t have the time or capability to develop, and wholesalers are continuing to refine their skills and relationships.

That is why Kerr doesn’t think surplus lines carriers bypassing wholesalers and going direct to retailers, a route some have taken, will become a major factor.

“I don’t think it will change the wholesale distribution landscape materially,” says Kerr. He thinks there will continue to be increased demand for direct access, but with a growing need for the specialized advice and service that the wholesalers bring to the coverage conversation.

The future is in very specific, specialized risk coverage.

Role of the Wholesale Broker

Others agree the most successful wholesale brokers will be those who have some specialization and who can capitalize on the need in the market for this expertise – not just in the future but today.

Kaufman doesn’t believe the role of the wholesale broker is changing.

As Kaufman puts it, it’s not the role that’s changing, it’s the appetite.

“I think agents have seen the need for brokers more now than in the past. Brokers have become more specialized. Agents look to certain brokers for certain lines of business. Brokers have built their careers around lines of business,” he says.

That specialization is an easy sell, says Kaufman. Agents looking for specialized coverage also look for a specialized knowledge base, which the wholesale broker now provides.

How deep is the knowledge? If Kaufman’s company is any indication, the knowledge is quite deep. “As wholesalers, besides having access in the markets, we hire top students from top universities and from top companies,” he says. “We put a lot of emphasis on our training and development.”

Kaufman believes another benefit of wholesalers is that they free up time for agents. “It’s a resource. Now you have access to knowledge and access to markets and products you don’t have,” he says. “Agents can focus on business without having to know all these specialized products.”

There has been a shift in how wholesalers approach the markets, according to Kaufman. The broker is dealing with the agent, but he’s also dealing with the markets – markets that will have to be appeased, says Kaufman.

“They (brokers) have to make sure to maintain the right markets and provide the right business and right risk to those markets,” he notes. Savvy carriers, he adds, will know what to focus on. “Are we bringing in the right business and working with the right agents? There’s a lot of markets and agent management. The stronger wholesalers can maintain the stronger markets.”

Partnerships

As Heinze noted, new affiliations, partnerships and relationships are gaining popularity within the wholesale community. The benefit for carriers is access to a wider distribution channel than they could have accessed without the wholesaler. Kaufman says “most retailers can’t put enough volume into the market to maintain contracts or enough contracts. Wholesalers can consolidate business and contracts while a retailer might have just a handful of contracts in their office.”

Hiscox, an international specialty insurance group, relies on wholesale brokerage to be the distribution channel for the company’s U.S. business. Now with just six offices in the United States, Hiscox is hoping to increase its business in the states through specialized wholesalers, according to Gary Head, chief underwriting officer for the company’s U.S. operations.

Head won’t divulge how many wholesale brokers the company utilizes, but says Hiscox has a “significant and material amount” of business with wholesalers and that wholesalers are playing a big role in his firm’s U.S. business growth strategy.

Hiscox thinks wholesalers are valuable for one trait in particular. “They bring a partnership, if you like, as to how to sell specialist lines in the general marketplace,” Head says.

In Head’s estimation, wholesalers become experts in a particular area and trusted advisers to the generalist brokers.

In Head’s experience, the specialty wholesale broker has gotten stronger over time. “It’s a testament to their expertise and their ability to work with insurance carriers to distribute those specialized products over a much wider area.”

While many carriers do have relationships with wholesale brokers, it’s not universal. According to Head, “There are many companies that won’t value the expertise and distribution the wholesalers bring to the table. That will be an interesting landscape to observe as things develop over time.”

Paying attention to a changing landscape is essential to competing in the wholesale broker market, says Head. “If you’re not watching how that landscaping is developing, you don’t have the full picture.”

As long as there’s a strategic reason for it, wholesalers will be focusing on specialization, say the experts.