Dig Deep

Specialist wholesalers spent decades trying to convince retailers there’s more to selecting a wholesale partner than volume. As market conditions continued to deteriorate, retailers took steps to reduce the number of wholesale partners—cutting ties to many in the wholesale space that couldn’t (or chose not to) bring “big” to the table.

Those who insisted on a singular focus—continuing to do what they do better than others—may be rewarded for their perseverance. As rates continue the slow climb back to reality, and rationality finds its way back to the underwriting process, the result very well may be what David Pagoumian, CEO of Napco, recently told me: “I see large retail brokers trending back toward specialists.”

Like several others in the wholesale space, Napco is not constructed on a model of high-volume transactional brokerage. The Iselin, N.J.-based firm specializes in insurance programs for high-risk property accounts. Specialty wholesalers like Napco represent a segment of the business that has struggled to maintain a presence since market conditions went south.

But things are changing. Pagoumian says that, in the property insurance market, specifically for catastrophe-exposed property, there are signs rates are climbing and underwriting standards are tightening. He attributes this to a number of factors, including changes in catastrophe models, including a new version of a widely used U.S. hurricane model from Risk Management Solutions and the severe property losses suffered worldwide since the beginning of 2011. Pagoumian and many others in the industry also anticipate January renewal prices for treaty reinsurance will rise 10% to 15%. Rising reinsurance prices would further affect property insurance rates.

The belief that specialist wholesalers like Napco will gain market share in the very near future is not wishful thinking. Hardening conditions usher in tighter underwriting standards enforced by more demanding underwriters. While it’s true that some large retailers have access to complex account data and resources in-house, many agents and brokers rely on specialists to help deliver comprehensive submissions to the carrier. Further, many large wholesalers allocate the lion’s share of resources to improving efficiency in transactional brokerage, choosing not to focus on account specialization or underwriting. Pagoumian believes more retailers faced with increasing prices and stringent underwriting demands will turn to specialists for assistance.

“What I believe we do better is dive deeper,” he says. “We tend to get deeper in our analytics. We play underwriter to a greater extreme than what many retailers expect when they utilize the wholesale space. You will never see us get a submission from a retailer and just hit the forward button.”

While changes in the marketplace may offer conditions suitable for growth for smaller, specialist wholesalers, actually getting in front of potential retail partners and forming new relationships is easier said than done. This is especially true for larger retailers that have invested significant effort in consolidating wholesaler relationships over the past few years. Pagoumian acknowledges that the lack of what he calls “critical mass” is detrimental for firms like his.

“We’re in the same waterways as the big houses. But not having the critical mass [of a large wholesaler] does present some challenges,” Pagoumian says. “When I go in to see a large retailer, the challenge is getting past the mentality that ‘big needs big.’” Most of Napco’s retail clients are ranked in the top 100 in premium volume.

His approach is to focus the conversation on new business rather than asking for a piece of an existing book or account. “When I go in, I’m sensitive to the fact that there’s a relationship with other wholesalers. I’m not going to ask the retailer to simply give me a piece of that other wholesaler’s work. Instead, I’m going to ask for a chance on new business. It doesn’t cost them anything to include me in the new account process, and it’s my chance to deliver a better experience and hopefully form that new relationship,” he says.

Napco’s expertise and resources are not limited to the catastrophe property marketplace. “Historically, we’ve always focused on catastrophic property risks. A relatively new development for us is strengthening our presence for risks that may not be classified as catastrophic but that standard markets don’t want to write.” He says the effort to place more non-catastrophe business has been driven by retail clients. “What taught us that the marketplace had demand for us to write non-CAT business was reviewing submissions from our retailers. We think we can gain more traction in the non-CAT space because of our process. We use the same analytic skills we use for more complex, high-risk accounts.”