Sometimes insurance is full of nuance and words that have multiple meanings based on context; wholesale is one of them.
There’s a joke about insurance and Costco somewhere in here, but for today we’ll be chasing down the ways the industry uses wholesale, and how wholesalers are regulated across the board.
What is an insurance wholesaler?
By far the most common use of “wholesaler” or “wholesale broker” in insurance is in the property and casualty space, where “wholesale” is used as a shorthand for any agency selling non-admitted coverage. But in the life insurance space, you may come across “wholesaler” being used for any business organization that’s not a carrier and not a retail, consumer-facing firm. Some of the most commonly referred to wholesalers include MGAs and BGAs.
So, which is it? There’s no consensus, really, as you might expect if you’ve been in this business for a minute or two. But the difference between how “wholesale” is used often comes down to who is using it and whether they are life/health-oriented or situated in P&C.
We’ll also mention that insurance wholesalers (or wholesale insurance companies) are different from wholesale insurance, which is an insurance product offering for wholesale companies.
What is a P&C insurance wholesaler?
P&C insurance wonks most commonly refer to surplus lines, or excess lines, when they’re talking about wholesale insurance companies. So, in the P&C insurance space, managed general agencies (MGAs) and surplus lines brokerage companies are wholesalers. They offer access to non-admitted insurance. Even if an insurance carrier is admitted to do business in a state, they still may offer non-admitted coverage through a wholesaler such as an MGA or surplus lines broker.
Surplus lines brokers can’t bind coverage, but they often facilitate non-admitted insurance sales by pulling multiple similar non-admitted insurance products together and helping consumers product-shop for the coverage they need that isn’t available in their state market. MGAs can do this, as well, although MGAs represent at least one insurance carrier that the MGA can actually bind coverage for and performs some degree of underwriting on policies.
These differences may set MGAs and surplus lines brokerage agencies apart, but ultimately “wholesale” could refer to either of these business structures. Essentially, for P&C businesses, “wholesale” is more or less synonymous with businesses that offer access to “non-admitted” or “surplus and excess” coverage.
What is the most common meaning for wholesale in a life insurance LOA context?
In life insurance contexts, “wholesale” is far less likely to be used to refer to non-admitted coverage and far more likely to refer to an agency or business entity that isn’t “retail,” or consumer-facing.
In this context, businesses such as managing general underwriters (MGUs), insurance marketing organizations (IMOs), field marketing organizations (FMOs), national marketing organizations (NMOs), or brokerage general agencies (BGAs) would all be wholesale businesses of some kind. The idea is that, since these businesses don’t face the consumer, they represent a purely back-of-business function in the distribution channel between carriers and producers.
This way of looking at the industry distribution chain makes pretty much any non-retail agency a sort of wholesaler. The role of agencies throughout the industry has come under increasing scrutiny from everything from the Department of Labor fiduciary rule to a sheer definitional approach to the businesses as independent agents – and not captive, direct writers – have become the norm for retail sales.
As the DOL fiduciary rule commentary and discussion noted, there may be several layers of these wholesale middle agencies or MGUs sitting between a carrier and producer. That makes it difficult to connect the dots between a producer and which organization is most responsible for their actions and oversight.
Regulating insurance wholesalers
As things so often do in insurance, the critical information of what a wholesaler is and does comes down to regulation. There is no regulatory category of “wholesaler”; at some point our shorthand definitions here break down. Instead, you have the reality of MGAs/MGUs vs. other “business entities.”
MGAs and MGUs are bound to act by their state’s version of the MGA Act. If you need a refresher, the general point is that an MGA or MGU takes on at least a portion of a carrier’s underwriting, and provides a sizable percentage of sales. If that sounds like you, your business has to follow a certain number of financial regulations that have to do with what obligations you fulfill for your carrier partner, how you financially deal with those obligations, and whether you provide the carrier with adequate transparency into what commitments you issue on their behalf.
MGAs and MGUs must also validate their producers’ licensing information to ensure sales are legal (yes, even for surplus lines sales), and, in some cases, may be responsible for making appointments on behalf of their contractual carriers.
Business entity regulation
For business entities that aren’t MGAs or MGUs, regulatory requirements have a lot more variation across states. Most states require business entities to register with the state, report a designated responsible licensed producer, and even maintain a firm-level business license. This is the case for many surplus lines brokerages, so, regardless of how you consider the word “wholesale,” most agencies or non-MGA/MGU businesses that participate in any kind of wholesale will still need a degree of licensing and maintenance with the state.
Business entities, agencies, or brokers – however a business might identify its role – if they don’t underwrite products, their financial statements don’t need the same level of transparency. However, even if they don’t have the authority to bind coverage, states generally require all business entities working in insurance to take on some responsibility for ensuring their producers are validly licensed to provide the correct services, and that they aren’t extending contracts to people who aren’t properly licensed or, worse, who have a background of malfeasance.
Even in the case of surplus lines brokerage agencies, states generally hold they should ensure their surplus and excess brokers are appropriately licensed in compliance with that state’s standards.
Regardless of whether you would call yourself “wholesale” or not, if you sit anywhere in the insurance distribution pipeline, chances are, you have to validate producer licensing data and could use a less manual, more refined, and more integrated process for making sure you operate on the up-and-up. If you’re ready to see what better looks like, talk to AgentSync today.