Specialization in Insurance

David Bowcott

Unlike previous inflationary periods over the past 40 years where specific commodities like fuel or steel have gone up in price, this go-round we are seeing broad-based inflation where almost every product or service in the market is seeing a price jump. Some items have gone up a little and some have gone up a lot.

When it comes to property and casualty insurance, especially within the construction sector, global price increases have been substantial, with prices going up 25 per cent for each of the past four years. These increases have hit construction stakeholders in two ways: first on their practice, or annual, insurance policies; and second, and perhaps more expensively, on their project-specific insurance policies.

When market pricing was falling, most insurance intermediaries (or insurance brokers) could more easily track where the best insurance terms were in the market. In the hard market of the past four years, with insurance prices rising dramatically, it has become more difficult for construction stakeholders and their insurance intermediaries to find the best terms.

Insurance capacity within the global construction insurance market has receded substantially across most relevant construction lines leaving many searching not only for capacity, but improved broking and underwriting methodologies to achieve the best terms from the market.

BROKING AND UNDERWRITING

So, what are these “improved broking and underwriting methodologies” and how are they providing better insurance terms?

Rather than providing an exhaustive list of these methodologies, let’s just focus on a few key vehicles that tend to grow in importance, and in numbers, when a hard insurance market hits the economy.

These vehicles are wholesalers, Managing General Agents (MGAs) and Managing General Underwriters (MGUs).

In many respects, these vehicles are hidden behind the scenes within the insurance industry and their value is often downplayed by those in the primary intermediary role, but they are vital tools that every construction stakeholder should be aware of, should be introduced to, and should incorporate into their risk finance strategies.

WHOLESALE INSURANCE BROKER (WHOLESALER)

A wholesale insurance broker acts as an intermediary between the retail insurance broker and an insurance company. These wholesalers often possess specialized skillsets when it comes to specific lines of cover, which can gain them greater access and/or influence with insurance capacity.

MANAGING GENERAL AGENT (MGA) AND MANAGING GENERAL UNDERWRITER (MGU)

MGAs and MGUs have specialized skillsets that allow them to gain underwriting authority from an insurance or reinsurance company for specific insurance products. They can administer programs, negotiate contracts for insurers, bind coverage and even settle claims.

Insurers provided delegated authority to these MGAs and MGUs because they have specialized underwriting capabilities and/ or proprietary risk management tools that are not available to the insurer. The difference between an MGA and an MGU is the MGA handles all the administrative tasks and the MGU focuses more on providing a platform for selling insurance.

SEEKING OUT THE SPECIALISTS

These vehicles have access to specialized talent and solutions that the broader insurance intermediary marketplace does not necessarily have access to. Some may have a specific individual that has a deep understand of specific risks and how to prevent them. Some may have sole access to a technology or methodology that has a proven track record of mitigating insured risks. Whatever the secret sauce of the wholesaler, MGA or MGU, the insurance capacity supporting these vehicles believes they will obtain improved return by deploying their capital through these vehicles.

It is the specialization these vehicles bring to the table that allows them to offer best terms and conditions in the insurance market, and thus help construction stakeholders curb the impact of the insurance pricing inflation that we have seen over the past few years.

If your organization is unfamiliar with these vehicles, you should look into them. Further, if your primary intermediary isn’t harnessing the power of these vehicles in their brokerage strategy, they should be.

In some cases, primary insurance intermediaries (or brokers) are advised by their management to not bring in these specialized vehicles due to organization financial drivers. As a result, these organizations are putting their financial interest ahead of the interest of their clients.

At the end of the day, isn’t it best to have the people with the best knowledge of the specific risk you are looking to insure at the table when seeking to achieve best terms from the insurance marketplace?

David Bowcott is the managing director, construction, at NFP Corp. Please send comments to editor@on-sitemag.com.