Chapter 4: Company Selection and Marketing Suggestions

Company Selection

It is crucial to understand that both Wholesaler and Retailer share the responsibility of selecting a Wholesale Market insurer. This fact cannot be emphasized too strongly. In many situations, the Wholesaler is in a better position to make the initial company appraisal because of personal knowledge and awareness of those companies that constitute the Wholesale Market. However, this does not in any way diminish the fact that the Retailer has a greater than normal degree of responsibility in assuring that a non-admit-ted insurer is both solvent and reliable. Not only is this company qualification significant at the time of placement, it is an ongoing requirement shared by Wholesaler and Retailer to ascertain that the company remain solvent throughout the policy term. Any knowledge of a change in the solvency or reliability of a non-admitted insurer must be immediately conveyed to the insured. Both Wholesaler and Retailer have a common requirement to be certain that a reasonable effort is made to qualify a non-admitted insurer. The information must be secured from reliable sources and must be acceptable. Detailed inquiries pertaining to the capacity and financial stability of a non-admitted insurer is necessary. This includes an analysis of the insurer’s surplus, complete current financial statements and knowledge of an established, irrevocable trust fund if a state requires such a trust fund. The Wholesaler must be certain that a non-admitted insurer has capable financial management and adequate claims procedures. It would be a substantial error for any Retailer who is not specifically licensed for Excess and Surplus lines to attempt placement of coverage directly with a non-admitted insurer. Access to the Wholesale Market should be transacted only through a licensed professional Wholesale agent.

Available financial data on insurance companies is generally dated or inadequate, making it difficult to accurately determine the current financial status of a company. However, there are various sources of company financial and operational data.

POTENTIAL RESEARCH SOURCES:

1. Best’s Review:  www.ambest.com
2. National Association of Insurance Commissioners, NAIC: www.naic.org
3. Insurance Regulatory Information System (IRIS): searchable on the www.naic.org website
4. Standard & Poor’s: www.standardandpoors.com
5. Conning & Co.- Analysis of reserve adequacies: www.conning.com
6. Duff & Phelps: www.duffandphelps.com
7. State Insurance Departments: www.aamga.org/committees/governmental_affairs
8. Premium Finance Companies
9. Other Agents
10. The initial steps in qualifying the insurance carrier are vital. Wholesalers and Retailers alike are urged to recognize the great importance of this obligation to the insurance consumer. While responsibility for selection of a company is shared, it is primarily a responsibility of the Wholesaler because of the Wholesaler’s greater accessibility to information. If the insurer is an “admitted” company, this responsibility is shared by the state insurance regulatory authority, Wholesaler and Retailer. The Retailer has an increased liability if the insurer is a “non-admitted” company. The Retailer should refer to the specific state statutes to determine the extent of his/her responsibility in the selection of a company.
    The Wholesaler has a moral, ethical and legal responsibility to select a financially sound, reliable market. This is, however, a responsibility which is shared to a certain extent by both Wholesaler and Retailer. If a reliable, solvent company cannot be found for policy placement, it is the responsibility of the Wholesaler to notify the Retailer, as no coverage should be secured from such an insurer.
    The Wholesaler and/or its employees should have a personal knowledge of the companies represented, as well as an awareness of each company’s reinsurance program(s).
    Because of the shared liability of the Wholesaler and the Retailer, there is a parallel Errors and Omissions exposure. When the client’s policy is received from the insurer, both Wholesaler and Retailer should review the policy to be certain that the coverage provided is that which was ordered by the Retailer. If there are any differences, i.e., deductibles, exclusions, limits, policy dates, etc., the Retailer should be advised by the Wholesaler of any coverage variations.
    The Retailer should determine whether or not the company offered by the Wholesaler is licensed in the state through the use of one or more of the following sources:

• Insurance Department list of “admitted” carriers.
• Insurance Department list of “non-approved,” “non-admitted” carriers.*
• Insurance Department “White List” of “approved” “non-admitted” carriers.*

*Note that those lists referred to in items “2” and “3” are not available in all states.

Premium Tax
The Wholesaler must collect and pay a state premium tax on surplus lines policies. Regulations vary by state. The Wholesaler must pass this tax on to the Retailer, who, in turn, passes it on to the insured. There may also be a “policy fee” on “non-admitted” carriers and Lloyd’s. This “policy fee” is in addition to the premium tax and in most cases is fully earned. It should be reasonable in relation to the total premium. In some states a “policy fee” is not allowed.

Please check state websites for more information on applicable taxes and tax regulations.

Bond Requirements
Bond requirements will vary by state. The Retailer must be sure to check specific state statutes. Bond Requirements are usually the responsibility of the license holder, can apply to the Wholesaler as well as the Retailer, and guarantee payment of any premium taxes for non-admitted carriers that are due the state insurance authority.

Guaranty Fund
The principal question is whether or not the state Guaranty Fund applies to “non-admitted” carriers. This question should be answered in each state where coverage is provided. As previously mentioned in Chapter 1, New Jersey’s Guaranty Fund is the only one, at the present time, that provides protection for “non-admitted” carriers.

Inspections
The question of whether or not inspections are required by the insuring company and who pays for the inspections would have to be resolved by the Wholesaler with the insuring company. This information would then be passed on to the Retailer along with advice as to what inspection company should be used and the inspection fee payable.

Application Forms
The application forms used in the Wholesale market can vary significantly in both form and content. Because of these variations, the Retailer’s need for caution in understanding each application form is vital. It is important to note that many applications contain warranties that actually become a part of the policy.

Fully completed applications on original forms, containing the actual signature of the insured, are always required. The information requested by the application must be accurate. It is important that the application match the coverage requested. Because of warranty provisions, the Wholesaler will need all the documentation available from the Retailer and the insured (i.e., brochures, loss experience, insured’s business experience, and other pertinent data). The Retailer will receive a faster response from the Wholesaler by indicating on the application form whether the request is for “policy issue” or “quotation.”

Timely submission of applications has a significant effect on the placement of coverage. The Retailer should be aware that the class of business, size of the risk, total premium involved and the capacity of the market will determine the time it will take the Wholesaler to place the risk. Adequate lead time assures a much better possibility of placement by the Wholesaler.

Policy Forms
Some Wholesalers provide policy forms and some do not. Since the majority of the policies issued through the Wholesale market involve non-admitted carriers, it is suggested that a file of policy forms be supplied to the Retailer if the Wholesaler is using nonstandard forms.

When the Wholesaler is providing markets that use nonstandard forms, the Retailer should be furnished a checklist by the Wholesaler that emphasizes significant points of coverage which need to be reviewed. Some of the more important include:

• Policy exclusions and endorsements
• Territorial restrictions
• Any warranty conditions of the policy

The Wholesaler should advise the Retailer of any nonstandard policy conditions, coverage restrictions or limitations. This is an area where the need for full disclosure and communication between the Wholesaler and Retailer is critical.

Quotations
The Wholesaler’s quotes should be in written form and contain all the terms and conditions pertaining to the involved risk. If there are warranties such as Ansul System, Cleaning Contracts, No Entertainment or Dancing, Correctness of Claims Information, Mileage Restrictions, etc., these should appear prominently in the quotation.

Exclusions may differ from those the Retailer normally sees for the class of risk being quoted, and it is important to make special note of them and advise the insured.

The quotation may have an expiration date (30 or 60 days), and it will be necessary for the Retailer to inquire as to the validity of a quote which has expired. It may be necessary to submit a new application in some instances.

Binding Orders
The Retailer should be aware of the Wholesaler’s requirements to bind a risk after it has been quoted. Binding could require full or partial payment of the premium, may be subject to receipt of the original signed application prior to binding, or both. No backdating of effective dates are allowed.

In most cases, Wholesalers require the Retailer to send a written order to bind even when nothing further is required to put the coverage into effect. The written order indicates to the Wholesaler that the Retailer is completely familiar with all the terms, conditions and warranties of the quotation as well as any cancellation restrictions with respect to earned premiums and fees.

Marketing Suggestions for Wholesalers and Retailers

Wholesalers and Retailers who realize the advantages of creating a lasting marketing agreement may find these suggestions beneficial. The marketing hints for Wholesalers are directed towards establishing an awareness by Retailers of the markets, capacities and underwriting capabilities of the Wholesaler.

The marketing tips offered for Retailers assume that the Retailer has made the decision to use the Wholesale Market to complete the agency’s marketing facilities. With this judgment, the Retailer is in a position to identify target markets for solicitation using the specialty coverage resources of the Wholesaler.

1. Suggested areas of influence for the Wholesaler to use in establishing a market identity with Retailers.
   
   • Attend annual conventions of Retailers at both National and State levels.
   • Utilize Vendor booths supplied with brochures, outlines and testimonials of the Wholesaler’s capabilities. Booths should be in the “Trade Fair” location and attended by qualified representatives of the Wholesaler.
   • Identify the markets available to the Retailer.
   • Indicate that facilities go beyond Excess and Surplus lines and whether additional standard, nonstandard and specialty markets are available.
   • Make yourself available to educate Retail Agents at meetings and conventions.
2. Retailers can discover a productive area for the development of new accounts by implementing a target marketing plan. In order to effectively initiate a target marketing program, it is necessary to identify a base of prospective clientele. The potential of any target marketing program depends upon the marketing area of the Retailer and the ability of the Retailer to provide specialty coverage markets.
   Examples of specialty market prospects include:
   
   • Adult Day Care
   • Animal Mortality
   • Car Washes
   • Jewelers Block
   • Marine Risks - Hull and Liability
   • Recreational Vehicles

Next: Licensing Rules and Regulations