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Channel Check by Kevin Amrhein Misconception

Retailers shoot themselves in the foot thinking they pay the cost of wholesaler brokers, when it’s actually the carriers.

By  Kevin Amrhein

Fallacy—a 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 directly.

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 model?

“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 additional points.

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.

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