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CHICAGOWith prices soaring for scarce property insurance capacity in catastrophe-prone areas, surplus lines brokers say they are cutting their commissions to help make some arrangements more attractive to potential buyers.
Otherwise certain deals may not come together, said brokers attending the 2006 Annual Convention sponsored by the National Assn. of Professional Surplus Lines Offices Ltd., which was held in Chicago from Sept. 13-16.
There also is pressure from insurance buyers, said John F. Jennings, president of Tri-City Insurance Brokers, a unit of BISYS Commercial Insurance Services Inc. in New York.
Buyers are questioning their brokers whether commissions that are traditionally based on a percentage of premiums should escalate as dramatically as pricing for property coverage in catastrophe-prone areas.
"On deals that double, triple, quadruple (in price), I think compensation ends up being very negotiable," Mr. Jennings said. "When something goes up that dramatically for the same risk, some insureds certainly don't think the percentage formula should stay" the same.
So some of his brokers are reducing their commissions on a case-by-case basis, Mr. Jennings said.
Insurers, meanwhile, cite increased reinsurance costs and other expenses as reasons for reducing the commissions they pay to wholesalers, brokers say.
"The markets are definitely squeezing us on front-end commissions," said J. Neal Abernathy, president and chief executive officer for Swett & Crawford Group in Atlanta.
"We haven't seen much slashing yet," said Ronda Whaley, a property broker for Brown & Riding Insurance Services Inc. in Los Angeles. "But some (insurers) are holding the line. Some are starting to reduce their commissions."
At the same time, Ms. Whaley said that she and other wholesalers have been negotiating their fees on an account-by-account basis to help offset some increases in difference-in-conditions premiums.
Several insurers at NAPSLO's convention said they have not cut their commissions to brokers. But others acknowledged they have on some deals, particularly on complex arrangements involving layers of coverage.
Insurers can drive commission levels to some extent, some NAPSLO attendees said, because property coverage for catastrophe-exposed regions is now a "seller's market" with scare capacity in high demand.
But brokers say they are working much harder to find coverage for purchasers given the capacity crunch.
Obtaining the desired limits for property in a catastrophe-prone region currently requires more layering than usual, said Mark M. Smith, division president in New York for AmWINS Brokerage, a division of American Wholesale Insurance Group Inc.
Because of current market conditions, purchasers also are taking higher retentions and buying lower limits. So pricing for one layer on a given risk might rise 300%, Mr. Smith said, but the broker's overall commission won't increase by as much as it would had the entire account renewed its previous limits at a 300% premium increase.
Across all the lines of coverage that AmWINS places, the wholesaler's retained commissions remain unchanged, Mr. Smith said. But for catastrophe-exposed properties, AmWINS' retained commissions have dropped about 1% or 2%, he said.
AmWINS said its commissions vary by line and account size. Those commissions are generally 5% on accounts in excess of $100,000 and 6.5% on accounts of less than $100,000. Typically, retail brokers retain about 10% of commissions, the wholesaler said.