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Working With a Wholesale Broker

Working With a Wholesale Broker

A wholesale insurance producer ("wholesale broker" in this article) is a licensed producer (or broker) providing specialized insurance products to retail insurance agents and brokers ("retail agents" in this article). A wholesale broker will utilize insurers (also called "markets") who can consider accounts that the retail agent cannot place with their standard markets. These insurers underwrite specialized or hard to place insurance.

As a retail agent, you should expect the wholesale broker to provide proposals for insurance and expertise for these specialized accounts, and a share of the commissions received by the wholesale broker from their specialty markets. At Mercator Risk Services we provide both expertise and access to a wide range of markets for our professional liability and other coverages.

Wholesale brokers operate in the Specialty Lines Market, which is composed of both admitted (or licensed) insurers and surplus lines insurers. "Surplus lines" is short for excess and surplus lines, or E&S, and is also referred to as non-admitted. The surplus lines market is critically important to wholesale brokers, and most wholesaler brokers write more business in the surplus lines market (with surplus lines insurers) than in the admitted market (with admitted insurers). The surplus lines market is somewhat more complicated to utilize than the admitted market, but is easily handled with an understanding of what is required. A description of the Surplus Lines Market can be found elsewhere on the Mercator Risk Services web site.

The Surplus Lines Market

The surplus lines market is a small but important segment of the property casualty insurance market. The surplus lines market represents a significant segment of the commercial lines insurance market in the US (2002 figures):

Regulation, Financial Strength & Solvency

Each state insurance department regulates surplus lines insurers operating in their state, including monitoring the solvency of the insurers. However, unlike admitted companies, surplus lines insurers have freedom from rate and form filing. In other words, they do not have to file insurance rates and policy forms with the insurance department. Generally, accounts are only written in the surplus lines market after they have been declined in the standard market. In addition, coverage placed with surplus lines insurers is generally not protected by state guarantee funds.

Surplus lines insurer solvency has historically been strong. A.M. Best (www.ambest.com) has conducted an annual solvency study of the excess and surplus lines market for a number of years, completing its 10th study in 2003. Not only does the study address the financial strength of the surplus lines market, it also provides an excellent summary of the operations of the surplus lines market. Some comments from the 2003 study:

In addition, a number of the largest surplus lines insurers are well-capitalized subsidiaries of the largest insurance and financial services companies in the US.

Underwriting

Because the specialty lines market is designed to write risks that do not easily fit into the underwriting and rating "boxes" of standard companies, underwriting is designed to be flexible. Typically, each risk is underwritten and rated on its own merits, and the underwriter's own experience, expertise and perspective heavily impact the resulting terms and conditions. The underwriter will apply rates he or she thinks are appropriate, and provide tailored coverage as well. This can lead to variations in the terms and conditions quoted by various insurers for the same account that might not occur in the standard market. This is very different from the standard market and is to be expected.

Each underwriter will have his or her own requirements for information, and the standard Acord form will not be acceptable for most accounts. The professional liability, directors & officers, employment practices, and other lines of business handled by Mercator Risk Services are highly specialized and require specialized applications to assist the underwriters in making their underwriting and rating decisions. While Acord forms are not acceptable, Mercator Risk Services has on its web site for these coverages.

Each insurer will require its own application in order to bind coverage. In order to ease the burden on clients during the quote process, underwriters will review and quote from other applications and require their own application if coverage is bound. While this means that clients complete only one application to start the process, it can create problems if a critical piece of information is missing. While rare, underwriters can choose to withdraw their quote or change terms upon review and receipt of their application. The solution is to provide all information the underwriter might need early in the process, and then to provide the underwriter's own application with the request to bind.

Placing Admitted Business

Working with a wholesale broker should be an easy process, but sometimes the difficulties presented by account itself make the process more difficult. The underwriter is going to require more information, and may come back with additional questions throughout the process. However, the benefits of specialized coverage for harder or non-standard accounts and coverages outweigh any additional complexities. Note that a surplus lines license is not necessary for business placed by a wholesaler with an admitted insurer.

Placing Surplus Lines Business

Utilizing the surplus lines market can be somewhat more complicated than using admitted markets. The wholesale broker can provide the expertise and assistance you need to work in this arena. Unless you have a surplus lines license, only wholesaler brokers licensed as a surplus lines, or E&S, broker may place business for you with surplus lines insurers.

Because the types of accounts written in the surplus lines market are unique and the wholesale broker must be licensed to operate in the surplus lines market, wholesale brokers typically operate with a surplus lines license. In this capacity, retail agents bring their unique and higher hazard accounts to specialized wholesale brokers, like Mercator Risk Services, for placement in the surplus lines market (or a specialty admitted market).

Unlike admitted insurers, surplus lines insurers do not pay premium taxes. Therefore, premium taxes, often called "surplus lines taxes," are levied by the wholesale broker in addition to the premium and then paid to the insurance departments in each state. In addition, some specialized paperwork is typically required to show that the insured is aware that the coverage has been placed in the surplus lines market and that the agent has made a diligent search of the admitted market without finding coverage. The diligent search is typically evidenced by the retail agent with three or so declinations for the account from admitted market underwriters.

The Placing Process

The process of placing business with a wholesale broker is very similar to the process you would use to place business with your standard markets. While no two placements are exactly alike, the process works somewhat as follows:

Working with a wholesale broker should be a rewarding experience for both you, the retail agent, and your client. Both you and your client will benefit from the expertise, quality service and market alternatives provided by your wholesale broker. At Mercator Risk Services we look forward to filling that need for you for your professional liability, directors and officers and employment practices accounts. For additional information or to contact us please go to our Contact Us page.

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