How Retail Agents Can Best Use the Surplus Lines Industry

Do your homework. Check it over, twice. And an apple for the teacher wouldn’t hurt, either.

Once we get past the risk assessments, debt ratios and premium margins, insurance is still about relationships. For it is people that still determine customer exposures and what is needed in the way of coverages. It is people who gather the needed underwriting information and, then, once submitted, it is people on the other end who sort out one application from another, make the coverage decisions and process any resultant claims. A breakdown in communications and in understanding “what the other side needs” can be costly—to both your clients’ and your reputation.

So, no, we don’t throw papers against the wall and grade them by the way they land, to carry the schoolwork metaphor a step further. But the reality of today’s hard insurance market is simple—there are far greater applications for excess and surplus coverages right now than can be reasonably issued—both in terms of capital for risk exposure on the part of providers and the massive administrative burden and costs of processing so many applications on the part of the managing general agent/wholesaler. MGAs are being inundated with applications. In fact, submission counts have increased more than 70 percent in a year’s time.

Thus, only the best applications, in terms of appropriate use of excess and surplus to solve a coverage need and ensure completeness, have a chance of making the grade. We certainly encourage you to apply for the coverages your clients need. In this article, we will share some insights meant to increase the chances that you are successful, however it wouldn’t be fair if we hadn’t described the current market situation before we got started.

Why is that?
First, even though excess and surplus may comprise some of the exotica of the insurance world—and we don’t mean the glamour policies that insure the golf stroke of a Tiger Woods or the vocal cords of a Cher—MGAs that deal in excess and surplus lines are not looking to forego your business. And it isn’t just the 9/11 aftermath and a world of heightened risks that are plaguing us. Actually, exposure pressures that have been building for some time have run smack into a hard market front. Coverage categories like nursing homes, malpractice and transportation have been driven to the excess and surplus market. Similarly, issues with coastal properties, like molds or “hurricane streaks” have reduced conventional capacity. The excess and surplus lines segment has historically handled roughly 6 percent of the industry. Today, we are experiencing rates closer to 10 percent. In due time, softer cycles will return, releasing the safety valve. And as this issue explains, the appetite for excess and surplus, and the willingness of carriers to invest in more administrative infrastructure, has distinct limits.

Making use of E&S coverage
So how does a retail agent make the best use of excess and surplus lines coverage? Here is our perspective from the MGA side of the table.

Study the E&S marketplace. Excess and surplus is a practice keeper and practice builder for the retail agent, part of your sole-sourcing goal. If you are in a larger urban market, do a bit of research. Find out who handles excess and surplus, what risks can be covered, and where your submissions should go. Obviously, an established relationship with a wholesaler that handles the coverages you need will be a great asset.

Conduct a thorough analysis of your client’s risk. Here’s where the going gets a bit rougher. But we think this is one of the most important services you can provide your client—and the MGAs will help. Just like we can’t order every dish in a gourmet restaurant, the limited capacities and high premiums in play mean you must help your client pick and choose carefully. What risks must be covered? Where can a client choose higher deductibles or other forms of self-insurance? This is the time to emphasize your preventive insurance skills, which can be a great practice builder if you do it right and market its value to your customers. No one likes “studies,” so get to the key exposures quickly and accurately. Also, be frank about current premiums for surplus, some of which are two to three times higher than just a year ago. Prepare your customer for the inevitable sticker shock.

Study the MGAs. When you place a risk in the excess and surplus lines market, the broker’s relationship with the surplus carrier is extremely important, especially with respect to claims. Those MGAs who have the authority and capabilities to process claims confer a great advantage to your clients. Moreover, a trusted MGA is likely to have a better handle on the solvency and financial trustworthiness of the surplus carrier. We also think it is important to choose an MGA that has excellent market knowledge, with respect to product lines, geography and specific industries; solid financial resources of its own; a strong performance history through all types of markets; outstanding technical support; knows how to run a binding authority in today’s market; a comprehensive knowledge of state rules and laws, be it statutory considerations or otherwise; and a solid industry standing.

In summary, it will be more difficult and more costly to meet your client’s excess and surplus needs. Outstanding analysis of customer exposures, a preventive insurance bent, established wholesaler relationships and “button tight” applications will help get the job done. All of this is likely to require more multiple sourcing than in the past. Here, an MGA with broad-based resources will help. Your extra effort will be rewarded with customer loyalty and the opportunity to grow total premiums written and commissions.

David J. Price is executive vice president and chief underwriting officer, and William M. McCord, CPCU, ARe, ASLI, is senior vice president of Burns & Wilcox Ltd.

Editor’s Note: According to the Texas Department of Insurance, there are around 450 licensed managing general agencies in the state. One of the best, most up-to-date resources for researching them is Insurance Journal’s E&S Directory, located at www.insurancejournal.com. The Directory is also published twice yearly in print version.

Topics Agencies Excess Surplus Insurance Wholesale