Fees & Fumbles: Avoiding E&S Mistakes

Excess and surplus lines (E&S) can open up new opportunities, but it also comes with its own set of challenges. Shane and Tonya break down the common fumbles agents make, share how to avoid costly mistakes, decide when to say no, and discuss how build the processes that make E&S business work for your agency. 

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Transcript

Announcer: [00:00:00] This is IA Forward. Your playbook for success as an independent insurance agent. Here to help you knock it out of the ballpark are your hosts, Shane Tatum and Tonya Lied.  

Tonya: Welcome to IA Forward. We talk about agent success a lot, but lessons are usually learned through the challenges and mistakes that we make. 

So let's talk about some of those today.  

Shane: I'm so excited about this topic. I want to talk about the mistakes that I've seen agents make, and I made way back around just not understanding agency build versus direct build policies and kind of the Excess and surplus market versus the standard admitted market. 

Tonya: And this is such an important topic because with this market that we have been in for the last 11, 982 days, we're having to look at [00:01:00] those E& S lines more and more.  

Shane: We've seen over the last three years, I think, just this perpetual growth in the excess and surplus marketplace. And so more agents. Are finding themselves there for the first time, and I know that's why this is a great topic because they're writing a type of policy in a type of place, usually an M. 

G. A. Or surplus lines broker that they've never done before. They deal with things that are foreign to them. Especially if they came out of an exclusive personal lines world and now they find themselves as an independent agency and they're having to go to a broker to place a hard to place piece of property like a homeowner's personal lines piece of property. 

We're not even talking about just commercial here and there are things and elements around the billing side of this that. Surprise a lot of agents and I am always surprised That they're surprised [00:02:00] because it's something that i've been around for almost 30 years now Really quick definition in your mainline companies for auto home toys even commercial lines on the bop side of things This would be the hartford travelers liberty mutual Progressives of the world. 

Everything on the billing plan, like if there's a billing plan offered, it's not an annual, it's not paid in full or whatever. The company that the business is written with, not the agency, the company, bills the customer. It's called direct bill for short. The consumer doesn't understand this. What it should mean to you is that the company is going to bill the customer, EFT, buy mail, however you do it, credit card. 

They're going to bill, the customer is going to pay the company directly and you are going to receive a commission. On the other end of the spectrum here, just like it sounds, the broker, surplus lines broker, MGA, is going to bill the agency or invoice the agency after you've [00:03:00] bound or issued a policy through that broker. 

A lot of times these policies come with what's called a minimum earned. That standard industry minimum earned is 25%. So for easy math, thousand dollar premium, thousand dollar policy, the minimum earned 25%. You're going to need to collect a down payment of at least 250 or 25%. You can finance the rest. 

We'll get into that in just a minute with a premium finance company or the customer can pay you in full. It's one of those two things. It's very simple, but this is the part I don't want you to miss because I've seen this recently. With some agencies literally write a policy, sometimes in a couple of cases, pretty hefty policies like 20 grand and get an invoice from a broker. 

And that invoice is net of commission. So let the commissions 10%, 20, 000 policy. So they're going to send this invoice to you for 18, [00:04:00] 000. And if you thought this was going to be billed by the company, you are going to find yourself in a bad spot. You're going to find yourself in this situation where you didn't collect any money from the customer. 

Remember that 25 percent minimum earn thing? That means if the customer cancels after one day, they owe at least 25 percent and you owe at least 25%. So if you didn't cover yourself by collecting this money, the company broker is coming after you for that 25%, which in this case would be five grand. And you don't get any commission. 

A lot of independent agencies, traditional independent agencies with commercial lines operations and account managers and accounting departments, they do this every day in their systems. They do it really well. And there's a way to get good at this. There's a way to automate a lot of this. There's a way to set up a lot of different functions so that you protect yourself against it. 

But step one is being [00:05:00] introduced to this entire concept that there are policies that you can write out there where the insurance company is not just going to bill the customer.  

Tonya: The first time I ever broached this topic with Shane and with Holly, who I always say is our vice president of everything, they actually looked at me and said, let's go to lunch. 

They physically took me out of the office to have this discussion because It was so in depth and so much information. And when I hear new agents get this information for the first time, those eyes do start to glass over. Then I usually hear the question of why would I even want to do this? And one of those to me is the whole idea of fee income. 

We can charge a fee for this. That's a little extra something on the side when it comes to agency bill.  

Shane: And most agents do. Most agents do [00:06:00] charge a fee. Some states are regulated to the point that you have to disclose that you are adding a fee in addition to commission. So you got to understand your regulatory environment in your state. 

Here's the flip side of that. You don't have to do this. All right. You can say no, you can say, I can't help you. I can't place your account. Here's what brings you to the place of excess and surplus lines. Your standard preferred carriers have all declined. They're not going to write the account for whatever reason, and you have no place to go. 

And I want to speak specifically to my current or soon to be. Exclusive agencies, those from the captive system, those from the exclusive agency system, the company that you were exclusive to probably protected you from this by saying, sorry, we won't write that account. And you got frustrated because you quote, lost an opportunity in the independent agency realm. 

There is no [00:07:00] one, there is no. Field Manager, District Manager, Field Executive, Boss, that's going to tell you, Hey Sally, Hey Joe, you can't do that. There's only the Marketplace, and there's only your unwillingness to continue to search the Marketplace that's going to say, You can't do that is a market. Most of the time, it's someplace somewhere. 

If you search long and hard enough to help you place that policy or that account, but it's probably going to look like this from a billing standpoint, it's probably going to have this excess and surplus feel to it. It's going to have fees and taxes. It's going to need to be looked at through a different lens. 

And if you look at it through the same lens, you really are going to put yourself in a bind, in my opinion, we recently had a conversation around foam Jomo, and you need to look at this situation and go, [00:08:00] okay, am I going to do enough of this that I can get good at it, that I can. Automate the process. Do I need a payment vendor like an ePay policy to name one? 

Am I going to need a payment vendor that I sign on with? Am I going to need a premium finance company? Am I going to need to do this? Is this something I'm going to do regularly that I need to set up processes for, etc.? If it's not something you're going to do regularly, you might need to say no. That may need to be the boss in your ear. 

Step out of your salesperson's skin for a second. Step into your CEO mindset and look at it and go, Okay, whoa, am I about to have these on my books? Because guess what? There's a whole nother process that we haven't even gotten to yet. There's an endorsement four months from now that creates an additional premium or AP for slaying. 

When this AP is created, guess who's responsible for collecting the additional premium? [00:09:00] Tonya, anyone? I'm assuming that we are. Yes, congratulations. The agency is collecting the endorsement premium. And now you got a billing mechanism because you're going to get an invoice from the broker and you're going to have to pay that. 

Hey, you get to keep your commission. That's good, but you're going to pay on net of commission. If there's enough time and you've got this thing financed, now you got to go add it to the finance note and maybe spread that endorsement across the remaining payments. Oh, there's one more little act of funness that comes into agency build, excess and surplus business. 

It's time for the policy to renew. Guess what? You're in the Wild West of insurance, excess, and surplus lines. The policy does not automatically renew, and the customer doesn't automatically get a bill. You have to go get a quote for the renewal. You have to go present that to the customer after you've reviewed. 

All the new terms to see if [00:10:00] anything changed, any new exclusions, then you're going to have to go get a new finance quote, then you're going to have to put all that together and present that renewal to the customer, and then you're going to have to collect, guess what, another minimum earned down payment, and you're going to repeat this cycle, and what I see the mistake that agents make the most is they dabble off into this world, and then they are so frustrated because of the service load, which is back to square one, which was Tonya's point, why agents start talking about adding a fee in addition to commission on these policies. 

Tonya: I bring up the fee because I see people promoting this all the time on social media. This is such a great way to make money for your agency. I get it. It's a new profit center. Yes, but you have to decide if it's worth the financial risk. You have to [00:11:00] decide if you can handle the increased administrative work because we are salespeople and we are not fantastic at all of the stuff that is invoicing and collections and accounting. 

And ultimately, this really can create. Some cash flow challenges. So why would we do this?  

Shane: We're salespeople, so we don't like saying no. Maybe we have an incredible client. Maybe it's a referral from an incredible client and we don't want to let that person down. There's a lot of emotional reasons why we do it. 

I'm not advocating that we don't do it. I am advocating, though, that we understand it, that we educate ourselves, and we become expert at it from a process standpoint. That we really dig in and create the right process. And then, that will allow us to do it on a normal, regular basis. If you're not willing to do that, and you're just going to fly by the seat of your pants, then consider Trying to tell yourself [00:12:00] no, and saying no, and don't do it. 

Keep yourself restricted. If you're just going to dabble in it, to Tonya's point, don't do it. Don't do it at all. If you're going to have one, two, or three agency bills, surplus lines policies hung out there, then don't go down that path. You're not going to lose all of your business because you told one client, I'm sorry, none of my carriers are willing to write your Whatever it is that you've done and I understand agents are smirking and rolling their eyes at me a little bit right now Because what's going on here is most of the time when this pops up for the first time Is a really good existing client has brought you A problem and they want you to solve the problem and then you start trying to solve the problem and when you solve the problem Because you don't want this client to go down the street to another agency and that agency takes care of the problem and gets all of the rest of their business that you didn't want [00:13:00] to lose in the first place. 

And so we find ourselves stepping off into this dabbling world, but we don't have processes for it. So I'm more of the advocate of let's create a process for it. Let's do it really well, because I do not have a lot of faith that we as sales people, as independent agencies, who have no boss telling them they can't do something, I have no real faith that we're going to be disciplined enough to say no. 

Tonya: What does it take to make AgencyBuild be successful?  

Shane: You need some workflow processes. You have to understand who it is you're going to go to. So you need a handful of ENS, also known as excess and surplus, also known as surplus lines, brokers. You don't need 12, you need 2 or 3, okay? You need a handful of ENS brokers that you can get to know, that you can work with. 

Step 1. Step 2. You need a premium finance [00:14:00] company. I suggest a standalone independent premium finance company. I do not suggest that you use the E& S Brokers Premium Finance Company. They all own their own premium finance company. They are not going to love me telling you that. But the reason I suggest you have your own premium finance company that you work with is so that you always have all of your billing for all of your agency bill customers in one portal, in one place. 

Tonya: That one is definitely one of those you need to explain to your staff, because so many of your staff members will see paperwork that comes across from that carrier's premium finance company and automatically fill it out.  

Shane: Great point. Great point. Because that broker, that MGA is going to send you a finance quote from their finance company every single time and at renewal on new business. 

100 percent right. So watch out for that. Create some policies and create some guidelines around that. Number three. Is this going to be in the [00:15:00] world of agency bill surplus lines? I believe. You need a payment vendor in the world of automation and creating efficiencies. We used to have to wait on a check or get somebody to fax a check in and we would do a fax check deposit thing like, Ooh, it was ugly. 

We now have these incredible payment vendors. Who can take a credit card can take an EFT. They will set up a portal for you. It'll be branded for you where you can send your client or prospect a secure link, collect their down payment, collect their full payment if they so desire. And we use ePay policy. 

That's our official payment vendor. And that's also integrated into Integra Premium Finance. And so you see these worlds start to come together into this world of efficiency. A handful of brokers, a premium finance company, a payment vendor, one, two, three, and then We're going to build some processes around those [00:16:00] relationships. 

Tonya: How do you track this Hot Mess Express?  

Shane: We have an agency management system. You need an agency management system that also handles invoicing, etc. The one good thing about the payment vendor is they're really trying to take this invoicing thing to a whole new level and efficiency thing to a whole new level. 

I really love what they're doing because you can Really manage this entire process of collection of money on agency bill all within their portal. And it's secure and you don't have to have your people trying to collect credit card numbers by phone. Hold on, you know, what happens in that? People scribble it on a sticky. 

Now you just have a cyber breach potential problem. Like now what do you don't need that data? You don't want that data. Let the payment vendor collect it by having the customer or prospect enter that information into their secure side. You never see their credit card information. You never see their full bank account information at that point. 

[00:17:00] These are things that have really progressed over the last few years. And made this world much more efficient than it was 10 or 15 years ago. That's why I'm not afraid of it anymore for agencies. In our retail agencies, we've been doing it since day one. So we get it. We know how to do it. We have people. 

We have functions. I'm not scared of this as much as I was. Five to eight years ago for single solopreneur agencies.  

Tonya: So having a mom that's an attorney for things like this, you have a client trust account when you're dealing with clients money and you don't mingle that in your regular law firm checking account. 

Keep in mind if you do, this does not need to go through your regular agency checking account. You're going to need a client trust account, and now Shane's going to tell you what you actually need.  

Shane: So, I'm not going to say trust account in every state, because some states are trust states and some states are [00:18:00] not. 

So, I'm going to use a more generic figure, but number one, Tonya's 100 percent right. It does not need to be your operating account. If you want to let all your direct bill commissions come into your operating account, and pay your expenses out of your operating account, and those be one thing, fine. I got no problem with that. 

Collecting premiums on agency bill business and then paying that premium to a carrier, you are, in effect, holding that money as a fiduciary, with the exception of your commission dollars that you take out and move over to your operating account. I like to call them premium accounts. Not every state is a trust state and you want to be careful if you're not a trust required state. 

You don't want to call it a trust account because that comes with a whole different level of stuff. You always have to be in trust and in balance. And so a premium account can be an account that you do, I hope you don't collect down payments or payments for direct bill policies, [00:19:00] but if you do. Sometimes you are set up on a sweep account with the carrier. 

This is also a type of premium account is how you can sweep that money through. But in an agency bill world, you definitely want to have a premium specific account and you only want to put those premium dollars into it and then pay the premium dollars to the broker. The carrier on these agency bill policies. 

That is a great catch by Tonya that you do not want these funds mingled with your operating dollars.  

Tonya: Now I'm really going to try to embrace slang and acronyms and all of the things. What does E& O look like for E& S?  

Shane: The majority. of E& O claims are probably around E& S business. For those still learning at home, E& O, errors and omissions, E& S, excess and surplus. 

The reality of it is that surplus lines, excess and surplus policies, those are [00:20:00] synonymous, same terms, different terms, same meaning. Those policies are what I always refer to as the Wild West of insurance. There's no standardization to them. They can write in exclusions. They can do things. I once saw a policy for a oilfield tubular pipe manufacturer that excluded oilfield operations. 

Did somebody  

Tonya: catch  

Shane: this? Oh, it got caught. It got caught when it went wrong. True story. Here is a pipe manufacturing company. who manufactures pipe that goes directly into the oil field to drilling rigs and is used in drilling rigs all the time. And their policy had an oil field exclusion limitation. 

Surplus lines policies have these really fun terms. They call them endorsements. They are endorsements because they change the policy in the pure sense, but we always think about endorsements as adding coverage in the standard and preferred [00:21:00] world. We're going to endorse this policy for more coverage. 

That's generally the way our brains work. Surplus lines policies, a lot of times when they do endorsements, standard limitation endorsements, they're actually reducing coverage and they're actually exclusions. And so this particular oil field pipe manufacturer. had an exclusion on their policy for working in the oil field, which is where all of their pipe went. 

What happens, an E& S broker looks at the account and says, yeah, I'll write this for X number of dollars, but I'm going to throw on an oil field exclusion because I don't want to be in the oil field because my reinsurance company doesn't want to do oil field business or my Lloyd's. Paper doesn't want me to an oil field business. 

And so they throw this on there and unless the retail agent catches it, they have a piece of paper worth nothing for that particular client. And so E& O becomes very vivid. And that's why we need to review the policies that we're presenting to our customers in the [00:22:00] E& S marketplace. Now, really cool thing out there, AI. 

It's helping us here. They're helping us with policy comparison tools. I really love where a I has the potential to take the E. N. S. Marketplace in terms of efficiency.  

Tonya: We're not trying to discourage you from doing E and S business. We're not trying to discourage specialty lines business. In fact, at Integra, we have a specific program called Specialty Edge, where we're helping the agents in our group find the very best products for this. 

Shane: Absolutely. We're not anti E and S. We do a lot of E and S business. We know that the marketplace is better because of the excess and surplus arena. It helps us find and answer problems for our customers that otherwise would prevent them from doing business, prevent them from having the correct insurance in place.[00:23:00]  

It is a great tool for our industry. I just believe that you have to understand it. You need to understand what you're doing. You don't just need to think that it's the same as your standard preferred business that you've been riding. With the standard carriers, you need to understand that it's a different marketplace, that it has different rules or maybe in some cases, no rules, building processes and understanding just some of these concepts like minimum earned premium finance company. 

Payment vendors. These are all great components. And again, yes, we're very excited about the recent launch at the Integra Partner Network of our specialty edge. We know we feel that this is going to be really good for for our agents.  

Tonya: I'm going to leave us today with this quote from Billie Jean King. 

Champions adjust.  

Shane: Attitude to choice. Make a great one.  

Tonya: Bye  

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And with our comprehensive resources, profit sharing and bonus opportunities, technology, and peer support, all while you retain a hundred percent of your book with no penalties to exit. Integra. It's ready to empower you and your agency to find sustained growth. Find your way to Integra. Visit IntegraPartnerNetwork. 

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