Love Thy (Other) Middleman

They’re scrutinized by regulators. They’re under the gun from companies trying to figure out ways to go around them. They face fierce competition in a buyer’s market. They see companies appointing agents left and right again, often diminishing their role. They deal in shades of gray; their customers prefer black and white.Yet the E&S wholesaler is still alive and still kicking.

“It doesn’t appear that the volume of wholesale business that is conducted by our members for retailers has contracted any,” reports Dick Bouhan, executive director of the National Association of Professional Surplus Lines Offices (NAPSLO). “We hear a lot about the possibilities that the Internet, regulators and direct deals are going to disrupt or eliminate the wholesaler-retailer relationship but there’s no evidence that is occurring, at least not from our perspective.”

The dance between wholesaler and retailer is an intricate one. It’s “always a love/hate relationship,” said Mark Harris, CEO of Quadrant Insurance Managers, a Columbus, Ohio-based program manager.

And now, ahem, for a visual: “The retailer—the hunter/killer—drags the meat in the door,” Harris said. “Sometimes the kitchen staff doesn’t know what to do with it. Rather than let it rot, they take it to the wholesaler, who has a way of preparing it like they’ve never seen before.”

Were it not for the wholesaler’s expertise, the business would have been lost, Harris argues, but sometimes that isn’t enough for retailers who don’t like what’s been prepared, and have a difficult time serving the client dinner.

Wholesalers don’t quote standard BOP-type coverages, and things get confusing, Harris said. “So you have two real opposites moving towards the same center. On one end, a customer saying, ‘Fill this need,’ and the retail agent says, ‘Yes.’ On the other end the wholesaler says, ‘This is my special form and this the only way I can do it.’ Then the quote isn’t what [the customer] asked for—how that’s communicated back to the customer is the issue. The wholesaler is going to get named in a lawsuit even if what the wholesaler did was right.”

OK, enough of the hate. Back to the love part of the relationship.

“At a time when you couldn’t buy a company appointment, wholesalers were there for us at every turn of the way,” said Doug Cohen with Ensurance.com, an independent agency in Los Alamitos, Calif. “We haven’t forgotten that. Nor have we forgotten that we still, and will always, need them. Companies know they can’t be all things to all people. Enter the wholesaler. Have gap—will fill. And today, wholesalers are doing more than merely filling gaps. I see many wholesalers seeking to be the retail agent’s first and last-stop shopping.”

For best results, agents shouldn’t seek too many wholesaler relationships. “Some wholesalers give better service than other wholesalers—better pricing, better turnaround. But ultimately the wholesaler who spends the time and cares about his agents builds a relationship—and that relationship can get very strong between the wholesaler and retailer. In my mind the retailer sometimes makes the mistake of using too many wholesalers,” Cohen said.

Jim Armitage with Arroyo Insurance Services, Pasadena, Calif., agreed: “We have tried to narrow the number of wholesalers we do business with and strike some better deals with the ones that we are placing a great deal of business with.” What sort of deals? Extra commissions, waived fees, special underwriting and quick turnaround.

Gary Savelli of Basic West Insurance Agency in San Francisco, said he prefers to “maintain a relationship for one or two of my most common placements. Since we know them, and they know us, it builds a trust so that we can just bind risks without hassle when we need to. Within the wholesaler market, if I find some person—underwriter, etc.—who I really like, I will use that market no matter what.”

George Shaffer, who runs Marketfinders Inc. out of Albuquerque, N.M., has a unique view of good service: “If we can’t write it, we’ll tell you where to go.”

Wholesalers are into lots of interesting things that test the delicate relationship with retailers. For example, Cohen says retailers sometimes are “forcing the wholesalers
to push their capabilities to the limit by saying, ‘We don’t want you interfering with our direct client relationship,’ while on the other hand saying, ‘We want you to do as much of the service work as possible for us.’ And somehow, wholesalers, at least the successful ones, are finding ways to do it.”

Armitage said he’s “really cautious about doing business with the big guys who
happen to be owned by the big national brokers.” Why? “The retail side is competing with us in the middle market and we hate giving money to one of our competitors. We are also concerned about sharing information with the retail side.”

We shouldn’t be surprised by this push and pull. It’s not just in this business; the history of American business has seen manufacturers trying to reduce or eliminate the costs of distribution and get to the buyer. If they could, companies would eliminate the wholesaler and the retailer. Historically, they’ve never been able to do that.

Conversely, the retailer has tried to buy direct from the manufacturer without paying the wholesaler. In insurance, it’s not in the nature of the retailer to share commissions with anyone. And they don’t like to see that business going outside the contingency agreements of their standard markets.

“There is an old adage in the insurance industry that when companies make money it is good underwriting and when they lose money it is bad agents,” said Scott Hauge, president of CAL Insurance & Associates, San Francisco. “This statement is at the root of the problem between companies and agents/brokers and that is the lack of partnership between suppliers and distributors.

“When I started in the business in 1973 I worked for a major insurance company and was told that if we could do away with agents we would do it in a minute,” Hauge continued. “I’m sure many agents and brokers would say ‘if we could do business without insurance companies we would do it in a minute.’ The problem is both sides need each other and we need to strengthen the fragile partnerships that now exist.”

When Bouhan joined NAPSLO 19 years ago, his friends thought he was nuts. “They said the wholesale broker situation is very tenuous and wholesalers would be out of business.” Back then NAPSLO had 400 members; now it has 1,100. There were 500 attendees at the annual conference in 1981; there will be 2,200 in Chicago this year.

Say what you want about wholesalers. At least they know where the good parties are.

Peter van Aartrijk, a 20-year insurance industry veteran, owns a communications firm specializing in the independent agent distribution channel. To comment on this column, email: ijwest@insurancejournal.com.