Going for Wholesale or BROKE

Wholesale brokers, or general underwriting management agents as many have preferred to become known, are treading carefully through the battled landscape of the property and casualty market. Cost pressures and declining rates have also taken their toll on this sector of the industry, however, it has opened up opportunities for certain players to offer “outsourced services” to underwriters. Wholesale operators concentrating on core brokerage skills have also benefited by offering alternative markets to small independent brokers who are becoming increasingly pinched by the drive of insurers to secure large books of business.

As such, industry watchers believe that the future of the wholesale brokerage operator is promising. Still, the sector’s transformation is occurring in an almost paradoxical manner — on the one hand premiums are being lost to consolidator networks and insurers directly, while on the other side business is being boosted by strengthened relationships with independent brokers. In addition, while the broker networks have presented an alternative market threat to the core function of the wholesale operator, the reality of dealing with survival has spurred several relationships between the two groups — resulting in some surprising allies. Equisure Financial Network Inc. owns wholesaler South Western and The Hub Group Ltd. recently acquired KMS Insurance.

The transformation of the sector has led to several distinctions between the operators, depending on the particular business path each has taken — there now exists wholesale brokers, managing general agents and underwriting agents. All of these entities fulfill a role somewhere in between that of a broker and an underwriter. The sector emerged when offshore insurers authorized domestic managing agents to write business. Today, the sector has evolved into a two front market, insurers contract these organizations to outsource underwriting functions in niche and non-standard business and commercial brokers whose premium books are not large enough to merit big carrier interest place business through the wholesalers.

Underwriting niche

Ross Totten, president of South Western Group, says his organization is growing faster in terms of underwriting activities. This, despite a great number of consolidating insurers seeking — and not necessarily realizing — greater efficiencies and attempting to bring underwriting functions back inhouse.

“There’s no question in today’s market that our biggest competitor is the primary insurance companies,” Totten says noting insurers hope to realize savings by not having to pay the commissions received by wholesalers. “CGU, Economical…some of the more traditional markets are deciding to get into non-traditional business. Then there are others who are already writing this type of business, like Royal and Zurich.”

Mike Golding, senior vice president of communications at ENCON Insurance Managers, which focuses on underwriting professional liability, errors & omissions and directors and officers coverage, confirms that several major insurers which had outsourced non-traditional business in the past have begun reclaiming these functions. He notes, however, “we still underwrite on behalf of major companies because they believe we can do it more efficiently than they do. As long as we continue to provide the service in a profitable manner for the underwriter and the retail broker, we’ll have a prosperous future.”

Totten maintains that for every company considering bringing services back in-house, there are others looking to move authority outside. “We’re having more discussions with companies about outsourcing core functions than ever before. More and more carriers look at the cost of doing business and say to themselves that they can pass the expertise to someone who has the knowledge.”

One of the biggest obstacles for the sector is to change the perception among some carriers about wholesalers. “There are a few companies with preconceptions that wholesalers are trying to do business at the cheapest rate. They don’t understand that we bring a specialty underwriting bent to the class of business they have.”

Broker services

On the other end of the spectrum is the true wholesale broker offering specialized covers and providing smaller brokers with alternative underwriting markets. However, whether the latter remains a viable business source to the wholesaler remains to be seen. Frank Muscat, vice-president of underwriting at Genmark Insurance, believes so, pointing out that as market conditions continue to separate the small from large brokers, the demand for alternative underwriting capacity will intensify. “I believe there’s always going to be a need for our type of service among brokers. With even fewer brokers, it’ll be more difficult for them to place business with regular markets.”

In fact, the recent acquisitions suggest that the wholesaler operators and the broker networks are eyeing each other with a view to synergistic growth opportunities. The acquisitions involving South Western/Equisure in 1997, and recent The Hub Group/KMS Insurance, has created unique and complementary skills between the partners. Totten says the affiliation of his company with Equisure provided new capital to expand his organization while providing a broker customer base. This relationship has not been fully maximized, he notes, “the majority of our business comes from outside the network, only 4% is with Equisure. That’s not to say we do not get business from the networks, we do plenty of business with all of the networks.”

Michael Harrison, president of Equisure, says consolidation on the broker front will have minimal impact on the wholesale sector. He notes his organization’s acquisition of South Western signifies its support of the industry. “There’s still risks out there that are not covered by niche programs, but as the market gets harder, there are a lot of one-off risks that many broker networks may not be able to place with its normal market facilities. The wholesale market allows us to facilitate these risks,” he remarks.

Outlook

The wholesale sector is separating in its ranks — resulting in greater focus of the various operators. Companies such as ENCON and Elliott Special Risk are pushing specialized underwriting expertise while others like Genmark are providing a wide array of underwriting market capacity. South Western has become a rarity in driving both underwriting services and alternative capacity with roughly a 50-50 split in its business revenue.

While the sector appears to be holding its own against competitive pressures, it is unlikely to draw many new entrants, spokespeople say. “There’s only so much business out there. We deal with fewer companies than we used to. We’ve seen big, small and medium sized companies dabble, but there’s only so much business,” comments Golding. Muscat also expects the wholesale market will remain small and insulated. “Most of the people remaining in the wholesale business have been there for ten to twenty years. It’s not something just anyone can jump into, wholesale underwriting is a specialized type of underwriting — it’s unlikely that the total number of people in this sector would fill a bus.”