Of wholesalers and brokers, there has been grumbling galore. Wholesalers, managing general agents and program administrators add yet more cost to the distribution chain, the argument goes. Why not just replace them with technology, or get rid of them altogether, critics muse? What kind of nominal service do these middlemen really provide?
Fair questions all. But in truth, wholesalers, managing general agents, managing general underwriters and program administrators all provide expertise the market desperately needs. They are specialists, and offer services that others in the distribution universe don't or can't offer.
With risks becoming ever more industry specific, there's no question specialist intermediaries provide value. How much value is another question, of course, but who can deny that the risk profile of a U.S.-based international bank holding company differs from a Europe-based bank company? Who can argue that there are obvious and more subtle differences in risks facing directors of a community bank compared to risks facing directors of a credit union?
Skilled program administrators can sniff out the differences between underwriting a drought-stricken crop farm in Oklahoma and a withering dairy farm in Wisconsin. Or how about the differences in underwriting the risks of a nationwide trucking company in the United States, and its counterpart in Canada, where the rules of the road differ, and where the signs are written in French?
Here's the point I want to drive home. Wholesale intermediaries benefit the buyer side of the marketplace. Since wholesalers broker all the business submitted to a particular risk or class of business, wholesalers are in the best position to bring more volume to an insurance carrier and negotiate a better price.
The seller-side of the insurance marketplace also benefits. A program administrator underwriting a group of homogenous risks on behalf of a carrier offers efficiencies an insurance company couldn't achieve on its own. Program administrators offer access to specific carriers with a robust appetite for a particular coverage, and an opportunity for focused risk management and loss control services.
Don't forget that beyond the buyer and the seller lies perhaps the most important part of the equation: the risk itself. The risk is constantly changing. Think of the wholesale intermediaries as finely tuned eyes and ears who serve as sluice gates controlling and redirecting underwriting talent to match changes in the risk.
This expertise comes at a price -- a "frictional cost" perhaps, in insurance parlance. But so what? That's part of the specialty the wholesale distribution system offers. In the end, buyers and sellers get what they pay for.
Another intermediary in the transaction means more specialized service and that comes at a slightly higher price. Who can quibble with that?
CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at email@example.com.
October 11, 2012
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