Counterpoint: Down with the Middle Man

The last thing carriers need is to undercut their value by handing the reins on any risk to an intermediary.

The last thing carriers need these days is to undercut their value proposition by handing the underwriting reins on any risk to an intermediary.

This magazine gave a Risk InnovatorTM award this year to a risk manager, Penn National Gaming's Jacques Arragon, who empowered himself to the degree that he and he alone, called the shots with his insurance carrier. Yes, he used his broker on occasion, but he was just as likely to pick up the phone and talk to his carrier himself if the situation demanded it.

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The spirit of what Arragon did is behind the thrust of this argument, that the best risk management relationships are the ones with the fewest layers and those which give the risk manager the most control over his or her program. That's why using a managing general agent or a wholesale broker might not be in a risk manager's best interests.

For one, there is the issue of price transparency. The compensation arrangements for primary property/casualty brokers is still too hazy. Add to that, vagaries around what contingent commissions or other compensation carriers could be paying to a wholesaler or a managing general agent and you have more mystery than you would want.

On the other side of the transaction, why should a carrier be comfortable handing over underwriting responsibility to a managing general agent? This seems to undercut the very service that the carrier is being paid a premium to provide.

The risk manager needs to feel that they are being charged a premium that is fair. Experts already tell us that the industry struggles with justifying its pricing structure to clients.

The insured is no dummy. He knows that the carrier collects premiums on an entire pool, pays out on the losses and invests the rest. The carriers already do well with this business model. How can a risk manager be left feeling good about this arrangement if built into the cost of his premium is a layer of intermediary that he can do without?

Many brokers know the market as well as anybody, and risk managers should push their brokers to leverage the resources of their firms to give them the best service possible. Brokers know how competitive it is out there and will deliver that service if they want to keep the business.

By using a wholesaler or a managing general agent, you are tacitly accepting the proposition that neither your broker nor your carrier really knows what they are doing, and you are willing to pay triple, knowing what you know.

Risk managers who expect anyone to treat them seriously under that kind of arrangement are reaching and calling into question why anyone should be paying them.

DAN REYNOLDS is managing editor of Risk & Insurance®. He can be reached at dreynolds@lrp.com

October 11, 2012

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