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Binding Authority

Westrope sees an aggressive increase in binding authority as a path to vigorous growth.

By  Kevin Amrhein

John Klag is with one of the big boys. He’s executive vice president and COO of Westrope, the eighth largest commercial wholesale brokerage in the United States.

As the property-casualty industry struggles to grow amid soft pricing, Westrope plans to grow by thinking small. By establishing binding authority operations, the wholesaler, based in Kansas City, Mo., can help retail agents stay competitive on smaller accounts.

Within a year, Westrope launched two binding authority operations, which have the ability to quote and bind risks for retail agents on behalf of certain carriers. Westrope Insurance Managers of Florida, based in Brandon, a Tampa suburb, wrote its first policy in June 2008, and Westrope General Insurance Agency, based in Irvine, Calif., wrote its first in May 2009.

Klag expects binding authority operations to become a big part of Westrope’s business. “We’d like to see it at 30% or more overall,” he says.

While it can hasten transactions, the practice of extending binding authority has its critics. There are those who believe that insurers that relinquish underwriting control are inviting trouble. Binding authority operations are not usually a primary focus for traditional wholesalers. Many see it not as a growth strategy but as way to appease a few retail clients. Many shy away from the practice altogether.

Then there’s Klag. He says binding authority operations offer Westrope the chance to help retail partners stay competitive on smaller accounts.

“The main reason for binding authority is that our retailers need help,” he says. “We’ve got to be able to provide solutions for our retailers for all accounts, even smaller ones.” The binding authority operations typically write accounts that generate $25,000 or less in premium with minimums often ranging from $500 to $1,000. In contrast, the minimum premiums in Westrope’s brokerage business are typically $10,000 or more, Klag says.

The binding authority operations write risks typical of the surplus lines market—just on a smaller scale. These include writing property-casualty, inland marine, professional liability and other specialty coverage for businesses such as motels, restaurants, manufacturers and contractors.

“The key criteria are lower minimum premiums and classes of business that are not ideal for standard markets,” Klag says.

Does it make sense to develop a growth strategy that relies on writing more accounts that are small, often with minimum premiums? Klag has reason to defend Westrope’s strategy. “Binding authority business usually sees better retention,” he says. “It helps us smooth out the volatility in earnings typical in the E&S brokerage marketplace.”

Klag also believes Westrope’s binding authority operations will help the wholesaler spearhead more opportunities for coveted program business.

But the focus of the strategy is facilitating relationships with retail partners—old and new. “Our binding authority offices help us capitalize on existing relationships as well as form new relationships with new retailers that we never would have seen in the absence of these operations,” Klag says. The introduction of new retailers has provided a steady stream of brokerage opportunities for the wholesaler. Klag says that many binding authority carriers also maintain brokerage operations. “So it helps form and strengthen relationships on that side as well,” he says.

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