Does wholesale distribution increase costs for insureds?

New analysis clears up debate once and for all

Does wholesale distribution increase costs for insureds?

Insurance News

By Bethan Moorcraft

There is a long-standing assumption among insurance buyers that wholesale distribution is more expensive than retail distribution. Now, the Wholesale & Specialty Insurance Association (WSIA) has released a study that clears up the debate once and for all. 

Analysis conducted by Conning, Inc. on behalf of the WSIA confirms that wholesale insurance distribution does not increase the cost of the transaction to the insured.

Conning’s Insurance Research Division examined distribution costs, cost structure, and ratios between the wholesale and retail channels from 2016 to 2020. The firm found that the total non-loss cost ratio for the wholesale composite was lower than the retail composite by 1.8 percentage points. In fact, wholesale non-loss cost ratios were lower in each year of the study, from 2016-2020.

This mirrors the results of earlier analysis published by Conning and the WSIA in 2016, which looked at the same data from 2010-2015 and found that the non-loss cost ratio for the wholesale composite was lower than the retail composite by 1%.

“Our mission was to prove that the introduction of a wholesaler in the transaction does not significantly increase the cost of the transaction,” said Brady Kelley (pictured), WSIA executive director. “We’re not here to say wholesale is cheaper. We’re here to say wholesale adds a lot of value to the transaction at no additional cost.

“We understand the long-standing misconception that wholesale distribution adds costs to the transaction. There is value that comes with introducing the wholesaler. They’re bringing expertise to the table, they’re able to customize coverages for the insured that specifically meet some of the most complex types of risks they may have, and they have access to specialty markets that retail agents don’t have access to. There are a lot of qualitative value attributes that come with the wholesaler, so one might easily assume that would also increase the cost of the transaction.”

While Conning found that the non-loss cost ratio for the wholesale composite was lower than the retail composite, the wholesale composite’s commission ratio was higher than the retail composite by about three percentage points for each year of the study (2016-2020). The average delta between wholesale and retail commission ratios between 2010 and 2015 was 3.45%, but that reduced to 3.06% between 2016 and 2020.

However, Conning found that this expense was offset by the wholesale composite’s non-commission cost ratios, which averaged 4.2% lower than the retail composite for the years 2016-2020, up from 4% in 2010-2015.

“There is a higher commission because the wholesaler is getting some level of commission in the arrangement,” Kelley explained. “However, that higher commission cost is offset by savings in other components of the wholesale distribution structure. I think the misconception was really based on assumption that ‘commission is higher, so cost is higher’ but in fact, that’s not the case.”

From 2016-2020, the annual growth rate in direct premium written for insurers in the wholesale composite exceeded the annual growth rate in direct premium written for insurers in the retail composite by 4.8 percentage points. This mirrors the compound annual growth rate from 2010-2015, when wholesale trumped retail by 3.9 percentage points.

“This analysis illustrates high value in solving complex risks with the types of innovative solutions that a wholesaler can bring to the table,” Kelley told Insurance Business. “We know that the qualitative values of wholesale distribution – the expertise, customization of the coverages, access to specialty markets – all of those things also come with the quantitative benefit of no additional cost to the insurance transaction. That’s our bottom line, and that’s the real message we’re trying to share out of Conning’s analysis.  

“The report is on our website, we’ve got summary information, we’ve published frequently asked questions (FAQs) – anyone who wants to take a look at this information can pull it straight from our public WSIA website. For WSIA members, we’re simply suggesting they study the information, and we’re encouraging all of them to share that data with their retail partners, risk managers, other insurance buyers, effectively all of their clients, because it’s a very positive story for the value they bring to the table.”

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