Managing the Retail Agent’s Risk in Surplus Lines
While it is common for retail agents to turn to E&S wholesalers for help, there are several reasons they should carefully consider which wholesalerto call upon and how they submit business, according to Bobbie Duke, mentor for INSURICA University.
“Generally speaking, surplus lines markets can present additional E&O risk for agents,” Duke said. “The most common E&O risk is that most surplus lines carriers are not covered by a ‘guaranty fund,’ therefore, if one of these markets becomes insolvent, there is no safety net, which clearly creates E&O exposure for the retail agent.”
A lack of consistency between surplus lines product forms and traditional standard market or ISO forms requires agents to be diligent when sending accounts into surplus lines.
“This means that we need to thoroughly peruse the forms for coverage gaps and limitations,” Duke said. “Invariably, this becomes a less-than-adequate process, due to time demands and even if standard ISO forms are used, and you know the content of those forms, there may be unique and/or onerous endorsements – margin clause on property, exclusion for the roof, or an EIFS form that significantly restricts coverage.”
Carriers offering E&O for agencies steer away from those with large books of surplus lines business. “In fact, there may be a maximum percentage of business that is allowed, in order to even qualify for a proposal for agency E&O from that carrier,” Young said.
James Keane, vice president of SIAA MarketFinder, offers a few questions for an agency to ask when considering a wholesaler or surplus lines carrier:
What carriers do they have access to? How many carriers can they get to? Does the wholesaler match up appetites to what the agency does?
“For example, if you’re an agent who writes heavy transportation, does that wholesaler have heavy transportation markets, or do they only have one market? So, if it doesn’t fit there, it doesn’t fit anywhere. Make sure they have what you need.”
Also, does the wholesaler or surplus line carrier have a minimum rating requirement? Do they have to be an A-rated carrier with A.M. Best, or are they just writing with anybody?
Keane also says agents should take note of what specialists are available to the agency. “If you’re writing an aviation risk, most agencies are not an aviation risk specialist, but maybe they might have a high net worth client who owns an airplane. Do they have a specialist you can talk to who specializes in aviation to make sure that your client is getting the appropriate insurance? Then, are there multiple offices that are available? If something goes wrong in an office, whether it be relationship-driven or maybe the office is closed, are there various places that the agency can get access to?”
R-T Specialty’s Tim Turner also believes conflicts of interest are important to consider.
“I would say that not having conflicts in your distribution model is a big deal,” Turner said. “Retailers don’t like it if you’re owned by one of their competitors. So, if wholesalers are owned by big retailers … that’s a big problem for them. Ten years ago, all wholesalers were owned by retailers but today it’s a very small percentage of them because of the conflict.”
According to Burns & Wilcox’s Alan Jay Kaufman, retailers want wholesaler partners with size, expertise and financial strength. “They want more national coverage in many cases, or global coverage. And they want to know about solvency and the strength of the organization. … Whether it’s the insurance companies’ ratings, all the way down to the wholesalers, people want to do business with organizations of strength. It doesn’t necessarily mean that they have to be huge, but they want them to be financially solid.”
Strong relationships are key to protecting agents from E&O exposure due to offering coverage in the non-admitted market, says Ralph Blust, president of Insureon Solutions.
“When you go into the non-admitted market, you’re dealing with more customized coverage forms. Therefore, if an agent is not accustomed to the coverage requirements of that individual risk, they might find something to offer in a non-admitted market, but it is not providing adequate coverage,” he said.
That’s why trust is important when using wholesalers in E&S business, he said “Any time that a non-admitted market offering is made, the agent has to trust who they’re working with to guide them through the coverages and, more importantly, the exclusions or excluded coverage components in the E&S product.”
An agency’s procedures for working with surplus lines accounts are critical.
“Every agency has a process that they follow when they write a new account. That process checklist, so to speak, for admitted business and non-admitted business is different,” Blust said. “It would behoove any agency to have a dedicated process road map for non-admitted business to ensure that they minimize any exposures that could arise due to the fact that they’re insuring something in the E&S space.”
Training is part of developing the process, he added. A trusted wholesaler broker can help agencies develop the process as well. “We have our own processes that are different for E&S versus admitted, and we share that in every transaction with our agents. We help them understand our processes and procedures to educate them not only about why it’s different but also to understand best practices.”
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