In What Direction is the Wholesale Market Heading’

Panel examines state of the market at IIAT seminar.

When a group of insurance wholesalers gathered at the 42nd Joe Vincent Management Seminar–held recently in Austin by the Independent Insurance Agents of Texas–they discussed a host of topics of importance to the insurance industry ranging from the investigations by New York Attorney General Elliot Spitzer to whether or not submissions were down in the excess and surplus market.

The group, which included Stephen D. Sprowls, with Professional Lines Underwriting Specialists Inc., Austin; Todd Teitell of Colemont Insurance Brokers, Dallas (formerly known as Heath Insurance Brokers); Ron Balcar, with Myron Steves, Houston; and Sam Cangelosi, with Texas General Agency Inc. in San Antonio, participated in a panel discussion on the “State of the Wholesale Markets” moderated by Bill Sleeper of Sleeper, Sewell & Company of Dallas.

Sleeper got things off to a lively start by introducing the “500-pound gorilla in the room”–the consequences of Spitzer’s investigations into the insurance industry and how they affect wholesalers–specifically with regards to the issue of disclosure of commissions.

“Spitzer will affect us all,” Sprowls said. “On the MGA side there are some contracts that have contingency components. [But] it’s going to have a dramatic effect on the retail level. Obviously any change in compensation structure is going to affect all of us together.”

Sprowls added that disclosure of a contingency arrangement may be necessary in some commercial quotes, depending on the insured. “I understand there were some bad practices involved and those practices we should all condemn. The sad part is the people who have been doing it right for a long, long time are going to get painted with the same brush. … It’s going to make it more difficult, and it’s going to raise more questions for all of us when we’re trying to deliver the product to the ultimate client.”

Teitell agreed that, “independent agents will take the biggest hit.” He said the uncertainty of who would be required to disclose commissions could cause problems. The situation could lead to a competition over commissions, he said, whereby “a certain class of insured that, at the end of the day they get their quotes and they start going commission shopping. … Some-body wants 10 percent; somebody wants 8 percent–it could lead to chaos.”

Teitell noted it becomes a “very confusing issue because of the chain–the retailer, the wholesaler, the London broker and the reinsurance broker possibly all on the same chain. What commission is going to be disclosed? Somebody’s got to define what full disclosure is and what is being disclosed,” he said.

North, South, East or West?
Turning the discussion in another direction, Sleeper asked the question on everybody’s mind–where is the market headed?

The group agreed that property rates are definitely coming down. Cangelosi observed that the “surplus lines industry in its eagerness to get back on its feet for the past three years probably has raised rates more than they should have been and now they’re going to start bringing them back down. … Property went up too fast and is coming down too fast. Commercial auto is still holding steady … but in general I think were going to see rates start heading south.”

He predicted that property rates could go down 30 to 40 percent, while larger casualty accounts could see a 10 to 20 percent drop. Whether rates decline and how much “all depends on loss experience,” especially with large accounts.

Balcar said homeowners rates were dropping 5 to 10 percent on average in Texas, but noted, “what we’re really seeing more than the rate dropping is a lot of these coverages that were taken away,” like water coverages, coming back.

Sprowls explained that with directors and officer, errors and omissions, and employment practices lines rate reductions are not guaranteed. “Certainly we’ll see some rates go down but it depends on the market segment as to how deep they’re going to go and if they’re going to go at all,” he said. “Very recently we renewed a D&O account on a small company and the price was down 30 percent. We’re seeing a discount … relative to the tremendous price increases they got in the early years of the decade.” Sprowls said while private company accounts may see some discounting, the public company market is still “getting hammered.”

Admitted versus nonadmitted
While submissions to the surplus market are down somewhat, business is “still being shopped,” according to Cangelosi. Balcar said submissions for his homeowners business are “staying steady.” He said since its introduction two years ago agents have been “putting everything” into Texas’ FAIR plan, or “unfair plan” as he called it. But, he acknowledged, since risks can only stay in the FAIR plan for two years he expects many of those policies will soon be looking for coverage elsewhere.

Asked how they cope with the requirement to place a risk into the admitted market if possible, the wholesalers said although there is a clear obligation to do that, what is not always clear is how to address that obligation.

Cangelosi said retail agents they do business with must “have standard companies. And if an agent sends us business we assume it was turned down by an admitted market.”

Balcar said it is the “letter of the law–if the standard market will write it you have to place it there.” But, he noted, the bottom line is that if the insured prefers the coverage in the surplus market and will pay for that coverage, the insured should have that choice.

The admitted and nonadmitted markets are different, Teitell said, and “each has their own advantages.” One thing that must be considered, he said, is what’s better for the insured, a “‘B-‘ admitted company or an ‘A+’ nonadmitted company?”

Topics Texas Agencies