Expert Commentary

Wholesalers: Who We Are

October 2001

In his first column on wholesale distribution issues, the president of the AAMGA, Baron Garcia, explains the role of the wholesaler in the industry, the benefits they provide, and tips on selecting a good one.

by Baron Garcia
American Association of Managing General Agents

As the owner of a managing general agency, and 2001-2002 president of the American Association of Managing General Agents, I appreciate the opportunity to bring the wholesaler's perspective to the readers of IRMI.com through the Wholesale Distribution Issues column. In coming months I will address individual industry issues in depth in this space. With this introductory column, though, I'd like to provide an overview of wholesale distribution and the managing general agency system.

My association, the AAMGA, has a formal definition of who we are and what we do, which I'm sure the lawyers and the public relations consultants labored over with great care: "The nation's premier trade association representing select, established members of local, state and regional insurance managing offices with contractual authority to perform managerial functions on behalf of insurers through the American agency system."

I want to go beyond the formalities and tell you, in my own words, what we're about. It's no secret that there have been cases in the past where a few unscrupulous wholesalers have tried to make a quick buck by taking advantage of careless or inattentive insurers. But they are no more representative of our profession than an accused traitor like Robert Hanssen is representative of the FBI.

The managing general agents I have come to know and respect during my 30 years in this profession are a diverse group, but share one vital characteristic—they are committed to long-term relationships with sound, stable business partners in our industry. Such relationships, by definition, start with trust that has been earned through years of honest, ethical dealings that have proven mutually beneficial to all parties. To maintain that trust, MGAs, the insurers they represent, and the retail agents they serve adopt strict, carefully monitored contractual agreements with extraordinary checks and balances designed to ensure, as much as possible, the integrity of all transactions.

That's the foundation. Atop that foundation, managing general agents have built a solid structure of services to our insurance industry partners. Below are some of the important roles we play in our industry.

Trailblazers

Managing general agents have a proud history of expanding the market for the insurance industry as a whole. We have responded to changes in society and changes in the marketplace by helping create new insurance coverages, such as employee practices liability, kidnap and ransom, tanning, and daycare. We help our customers identify risks they may not have even known they had and then find sound insurance markets, such as Lloyd's, that will share that risk. Because retail agents count on managing general agents to be specialists who can find a way to place a high or unusual risk, we will continue to lead the industry in developing new products and services.

A Hard-Market Resource

As premium costs rise and some coverages become harder to place, the versatility and broad contacts of an experienced managing general agent become ever more valuable. We are the key to the non-admitted insurers who give retail agents many more options in price and form. A veteran MGA not only has access to a wide variety of markets, he can also work with the retail agent to find ways to make a declined risk acceptable.

Reliable Business Partners

The American Association of Managing General Agents just celebrated its 75th anniversary. Our organization's Code of Ethics is the assurance that thousands of insurers and retail agents have counted on for decades of successful and profitable business partnerships with our members. Long-term, stable relationships with insurers and retail agents are the foundations of our businesses, and professionals on both sides know they can count on our members to bring strong, secure, reliable partners together for the benefit of all.

Risk Sharers

Managing general agents have risk in two ways: by participating with insurers financially on the coverage provided and by being in a business that is quite often subject to marketplace factors difficult or impossible to underwrite.

Managing general agents put into place a variety of insurance mechanisms to protect their customers, themselves, and the markets they represent. For example, many are compensated on a "swing"-rated basis. If the insurer makes money, the managing general agent makes money. Some managing general agents share in the potential losses of programs via a captive vehicle or by participating in the losses via a loss corridor or reinsurance vehicle.

Loss of an insurer is a significant risk for the MGA. The MGA might lose an insurer in any number of situations, such as the following.

  • The insurer cannot assemble its reinsurance.
  • The insurer is sold.
  • The insurer is hurt financially for reasons unrelated to the MGA's business activity.
  • The insurer simply decides to exit the marketplace, as many companies are apt to do in this market.

One managing general agent on the East Coast lost an insurer relationship to a merger. He lost another because of unacceptable financial results due to poor underwriting on lines of business unrelated to the coverage in which the MGA was participating. That same agency has lost two insurance markets in the last few months because the insuring entity could not place necessary reinsurance.

Members of AAMGA typically have relationships with several insuring markets, creating flexibility and stability in changing market conditions. Such multiple relationships allow AAMGA members to stay closely attuned to the market and to find insurers willing to provide coverage through independent wholesale distributors in difficult times.

The market is very tough today, but tough times tend to be the times that members of AAMGA are most successful. Many, if not most, of the toughest classes and most difficult lines are written through MGAs in this market.

Specialty Lines and Local/Regional Territory Expertise

Our agencies are independent local businesses. Our success depends on a thorough knowledge of local conditions and on finding markets for unusual or specialized insurance needs in those areas. Insurers moving into new geographic areas or retail agents moving into new coverage areas can tap that expertise and make that transition seamless.

Always Current

Our commitment to continuing education—through certification programs offered through AAMGA University, through seminars and other programs at the association's general membership meetings and our annual Automation and Technology Conference, and through use of the AAMGA Web-site is one more way our members stay on the industry's cutting edge.

Genuine Cost Savings

Both surplus lines insurers and standard insurers can rely on MGAs to serve as their regional branch offices. A managing general agency can serve as a local outpost, performing underwriting and binding, collecting premiums, and issuing and maintaining policies without the expense of hiring staff and renting space. There's also no "learning curve" to wait through, as experienced MGAs already have thorough knowledge of their local markets and the lines and coverages they handle.

It is unfortunate, but undeniable, that current economic conditions are affecting the insurance markets in many ways, including reduced staffing levels. In the process, companies lose enormous amounts of knowledge and expertise while increasing workloads substantially for the employees who remain. Working with MGAs is a cost-effective way to fill those gaps.

Choosing a Wholesaler

For the retail agent who up to now has not made use of this resource, working with a wholesaler can open up whole new areas of potential profit. But how do you know which wholesale agency to choose? The most important place to start is with integrity. These are some of the questions the retail agent should ask before dealing with an MGA:

  • How long has the agency been in business?
  • What professional experience do the agency principals have?
  • Is the wholesaler an active member of a recognized professional or trade organization, such as AAMGA, NAPSLO, CIC, CPCU or a state surplus lines association?
  • Have established insurers entrusted the wholesale agency with underwriting and binding authority? With authority to appoint agents?
  • Does the wholesaler maintain adequate errors and omissions coverage? · Is the wholesaler's area of expertise the right match for your business?
  • What are the wholesale agency's areas of specialization?
  • Does the agency offer primarily commercial or personal lines markets?
  • What lines can be bound by the wholesaler?
  • What are the policy limits of binding authority?
  • Can the wholesaler issue policies and endorsements?
  • Does the wholesaler have claims settlement authority? If so, what are the limits of that authority? Can the wholesaler assign independent adjusters? Can the wholesaler issue drafts?

By asking these kinds of questions, a retail agent can take the first steps to building a solid, stable, long-term business partnership with an insurance professional who can offer access to a wide array of high-quality products and services: the managing general agent.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author’s employer or IRMI. This article does not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.