Retailers shoot themselves in the
foot thinking they pay the cost of wholesaler brokers, when
it’s actually the carriers.
misconception resulting from incorrect reasoning.
It’s also the word chosen by Tim Turner, president of
CRC Insurance Services, when talking about the notion that
involving a wholesaler adds cost to the transaction—costs
which will be paid by the insured.
“The average transaction pays 10% (commission) direct.
If a wholesaler is involved in the distribution process, the
carrier usually bumps the percentage to 15,” he explains.
That 5%, a figure which could be quite substantial given the
scope of many E&S risks, is the foundation of one fallacy
many wholesalers argue misleads insureds into believing
wholesaler involvement increases the cost of insurance.
“In this situation, the additional 5% is absorbed by
the carrier, not the insured. The cost to the insured remains
the same,” Turner says. “Some brokers will say
foregoing wholesale lowers the cost of doing business by 5%.
They’ll say that savings is passed on to the insured.
Unfortunately, this is misleading.” He says this argument
is often made by larger brokers who may be better positioned to
take traditional wholesale accounts and place them
Traditional wholesale accounts tend to be higher hazard
risks. Wholesale offices nationwide brim with expertise for
these risks—expertise only select brokers may be able to
directly offer. For this reason, removing the wholesaler from
the risk may be a disservice to the insured. And to do so on
the platform that it reduces the insured’s cost?
Misleading, Turner says.
E. G. Lassiter, chairman and CEO of RSUI Group, uses an
example of a layered risk that is placed in part through
wholesale and retail markets: “If I take 20% distributed
through a wholesaler and get $100,000 in premium, and a retail
market takes 20% at $100,000, the price to the insured is the
same. If I pay more commission, it doesn’t change the
price; it means I receive less net premium after
commissions,” he says.
This seems the appropriate time to ask: Why would a carrier
willingly absorb the cost of wholesaler inclusion? Further, why
are some carriers exclusive subscribers to this distribution
“Wholesalers call on retailers on our behalf. They
keep us from having to be everywhere,” says Lassiter,
whose organization is a 100% dedicated wholesale market.
“We have offices only in Atlanta and L.A., and the only
reason for that is time zone,” he says. He explains that
wholesalers by design have reach and knowledge that may not
exist at the retail level. He trusts the placements coming in
from the carrier’s wholesalers and believes that any
additional commission cost more than offsets the operating
expense associated with a large retail network.
Hank Haldeman, executive vice president of The Sullivan
Group, offers a similar explanation: “Distribution
through a wholesaler acts to reduce the in-house production
expenses (such as marketing, distribution, and underwriting) of
the insurer. This more than offsets the commission retained by
the wholesaler. It is simply a different, no-more-expensive way
to handle distribution, effectively outsourcing functions that
the insurer would otherwise have to handle in-house.”
Haldeman explains that in many cases retailers receive the
same average commissions from wholesalers that they do from the
carrier. In this case, the retailer is not absorbing the cost
of bringing in a wholesaler, and the insured’s cost for
coverage remains the same. He agrees that, if anyone is paying
for the use of a wholesaler, it is the insurer in the form of
increased commission, but the ability to shift expenses related
to marketing, etc., and get them off the books easily offsets
Turner agrees. Many CEOs of wholesale dedicated markets, he
explains, say the cost of doing business is
“significantly” less than direct access.
Removing the wholesaler can hurt insureds in other ways.
Consider that many carriers choose to distribute some or all
product lines exclusively through the wholesale channel. A
retailer that closes this channel should proceed with caution.
Eliminating these carriers from the marketing process—one
that may be the best market for the particular risk—may
be an extreme disservice to the insured.
“It’s very possible that without a wholesaler
the insured may not be getting the benefit of access to the
full marketplace,” Turner says. “Considering the
cost of doing business doesn’t change, the insured is the
one that ultimately gets hurt.”
When a wholesaler is involved, who pays? The answer is:
“It depends.” (Remember, we are talking about
insurance, right?) However, the notions that involving a
wholesaler results in greater cost to the buyer or that the
sacrifice of retailer revenue is inevitable represent
fallacies, which these and other Council members hope to expose
and explain. Who knows: Maybe their efforts will be the reason
“your insured” never becomes the answer.
Amrhein is wholesale editor.