2010: A

The Road Ahead for Surplus

Lines Wholesalers

The model surplus lines insurance whole of 2010 should be faster, bigger, better, leaner, able to cross state lines and come in colors other than white.

Industry leaders predict that while there might be slightly fewer surplus lines brokers five years from now, new start-ups will offset whatever toll consolidation takes on the numbers. More surplus brokers will be licensed in every state and handle business regionally and nationally. Also, more firms will have female and minority executives.

Brokers who act as managing general agencies will be under the most pressure to survive, along with small, localized excess and surplus lines brokers, according to those close to the business.

Over the last decade, mergers have led to the creation of more national and larger regionalized wholesalers, noted Dick Bouhan, executive director, National Association of Professionl Surplus Lines Offices. AMWINS, CRC and BISYS are just a few of the acronyms the industry has come to know.

Industry executives expect that by 2010 there could be a few more national wholesalers and that regional brokers will have grown. These large national and regional wholesalers should carry a lot of clout in 2010, just as they do now.

“The market is defined by competition among and between major national and regional wholesalers,” pointed out Daniel Maher, executive director, Excess Lines Association of New York.

A.M. Best analyst David Blades suggested that broker merger activity, which has been flattened by the soft market, could pick up again by 2010. But nobody envisions merger mania among wholesalers between now and 2010.

Surplus entrepreneurs

NAPSLO’s Bouhan thinks that a few large firms might close a branch office or two but that the brokerage population will remain healthy as individuals seize opportunities created by the consolidation that has already taken place. Despite the mergers of the last decade, NAPSLO’s wholesaler membership has remained stable at around 400. Bouhan believes the number will be close to that in the future, thanks to the entrepreneurial spirit of surplus lines brokers.

“At the same time the national wholesalers were being created, people left them and set out on their own to start their own firms,” Bouhan said.

“There’s always room for someone who can provide the service. It’s a very entrepreneurial business. We will continue to see a lot of start-ups,” Bouhan added.

Maher observed that the people who depart established wholesale units to start their own operations tend to be well known and have their own accounts that are big enough to anchor a good-sized enterprise. He noted that by 2010, relationships between retailers and wholesalers, whether new or established, will have matured.

Bouhan, Maher and others said they would not be surprised to see more entrepreneurs break loose as firms such as Stewart Smith and Swett & Crawford are sold or rumored to be sold by their big broker owners, Willis and Aon.

The anticipated sales by giant brokers of their wholesale units should lead to more competition among brokers not only for top surplus lines talent but also for their surplus lines accounts, according to industry leaders.

“Each one pretty much had a captive production source,” said Don Urbanciz, CEO of Insurance Vianet Inc., which is the holding company for electronic wholesale broker Insurance Noodle. He believes they could lose some accounts to competitors. “Those large wholesalers will have to work harder now that they are independent and they are working in a softening market.”

Change in composition

While the population of surplus brokers might be about the same in five years, its composition could be altered as small local brokers as well as MGAs face several challenges, industry leaders suggest. On the one hand, they will find it increasingly difficult to get carriers to write their business or grant them underwriting authority; on the other, they will find online brokers gaining more of their small premium accounts.

Rick Lindsey, president and CEO of Utah-based Prime Insurance, said the challenges for local brokers are not new but are likely to get tougher in the years ahead. “Back 20 years ago the big insurance companies didn’t want to talk about small stuff, so you had to go to smaller companies or Lloyd’s to get an underwriter. For brokers, this has gotten worse. The number of companies and Lloyd’s syndicates have gone down. They are bigger, but it’s harder to get to them,” Lindsay said, suggesting this spells opportunity for smaller carriers like Prime to serve wholesalers as this continues.

ELANY’s Maher agrees the squeeze will be on smaller brokers, especially those without a market niche. “I wouldn’t want to be a smaller wholesaler with a broad range of coverages. Having an expertise in one area would be better.”

Quality the key

The quality of a broker-and of a carrier, too-will be more important than its size by 2010, according to one visionary. Marshall Kath, CEO of Dallas-headquartered Colemont Insurance Brokers, believes brokers will be judged less on size than on their quality, including their financial performance. “I don’t see any minimum critical mass but brokers will have to have adequate capital to be able to grow the business,” Kath explained. “It won’t be as possible to bootstrap an operation as maybe it was in the past.”

Quality will also be evident in the companies with which brokers place business, Kath maintained. By 2010, “There will be a further and increased reliance on insurers with strong rating and underwriting. The flight to quality becomes the flight to only quality.”

While quality may indeed be the defining force for the future, technology will also play a bigger role in wholesale transactions. By 2010, most observers agreed that retail agents will find more small premium surplus and specialty products have been standardized for electronic handling, although larger surplus accounts will still be handled individually.

Aggregators such as Urbanciz’s InsuranceNoodle and Dallas-based online broker Market Scout expect to become bigger players in smaller accounts by continuing to bring together retail agents and insurers via the Web.

By 2010, Urbanciz sees Insurance Noodle aligning with carriers that have a “different vision” of distribution. These will be insurers that may now be tied into MGAs but realize they can save money and reach agencies more effectively nationwide by switching to an online system for their products that can be written electronically. “Carriers are listening but saying, ‘not quite yet,'” Urbanciz said. But by 2010 he hopes to have them online.

Insurance exchanges

MarketScout’s Richard Kerr has his own potentially revolutionary vision of what distribution will look like by 2010 (see related story, “The Invasion of the Insurance Exchanges,” page N27). Kerr’s crystal ball pictures aggregators among a number of so-called insurance exchanges, or teams of individual insurers that provide retail agents with all the markets, including specialty and surplus lines, that they need.

The insurance exchange model could be mixed news for some wholesalers. Kerr thinks retail agents will come to the conclusion that on non-complicated specialty and umbrella products and renewals, the commissions or fees paid to wholesalers may be more than their service on those accounts is worth. The agents could insist that wholesalers charge flat fees for these accounts or give back some of the commission to their retail partners.

“Wholesalers have to really watch these exchanges,” Kerr warned.

While the development of insurance exchanges could be a challenge for some wholesalers, by 2010 other advancements in technology should make it easier for them to conduct business with their retail agents and electronically file with various state stamping offices and insurance departments.

Since the enactment of Gramm Leach Bliley, most states have made non-resident surplus licenses available. This has enabled national brokers to become licensed in most states and even allowed smaller brokers to “spread their wings” beyond their immediate borders, Bouhan noted. As a result, the number of active licenses has skyrocketed. In New York alone, where in 2001 there were 350 active excess lines brokers, thanks to out-of-state applicants there were more than 500 by 2004 and the number continues to grow, reported Maher.

Electronic filings by brokers with stamping offices are in their infancy now, but by 2010 they should be routine, officials predict.

Bouhan, who notes that a number of women have held key positions at NAPSLO and in surplus brokerages over the years, claims more minorities are also getting involved in the distribution business as evidenced by their attendance at NAPSLO meetings.

Others agreed more minorities would be involved in the years ahead.

“I expect to see changes in insurance management,” Urbanciz said. “The days of the white guy are numbered.”

See the Sept. 19 issue for coverage of: “Surplus Lines Products and Regulation in 2010.”

Topics Carriers Agencies Excess Surplus Insurance Wholesale