In many financial decisions, be they business or personal, cost will
be the most important, if not the only determining factor. This is
particularly true when the decision revolves around the purchase of a
product or service deemed to be a commodity, a characteristic often
attributed to both insurance and insurance brokerage services.
We will concede that in many cases, insurance products can be
fairly homogeneous, distinguished only by the difference in cost one
insurance carrier charges vs. another. We will further acknowledge
that there are many competent insurance brokerage firms to choose
from. Thus, we understand why many of the companies we meet believe
that choosing the right insurance broker should be as easy as
“whoever brings us the best price wins.” Unfortunately, like most
things insurance related, it isn’t quite that simple.
Broker of Record Dynamic
When we are introduced to a new corporate prospect for the first time,
usually following a completed transaction with one of our private
equity clients, prudent CFOs, COOs, and Risk Managers often tell us
that they would be happy to switch from their current broker to Equity
Risk Partners if we can “bring them a better price on their
insurance.” This is a seemingly logical statement to make, but in
many cases, is not based on a complete understanding of how the
insurance placement process works.
To no one’s surprise, the insurance industry has long taken a
unique and somewhat arcane approach to the marketing and placement of
insurance coverage. At any one time, an insurance carrier is only
allowed to communicate with one broker about a particular insured (the
“Company”) for a given line of coverage. This broker is referred
to as the “broker of record” for that particular carrier. For
example, an insurer will not provide General Liability quotes for the
Company to both Equity Risk Partners and another broker, only to the
broker of record shown in the insurer’s system. Thus, you can’t
have every broker approach the same carriers for quotes to create a
truly level playing field.
Market Selection
Once the Company’s insurance decision maker becomes aware of the
broker of record mechanics, he or she often chooses to “split
markets” among the various potential brokers under consideration.
Each broker can then approach its assigned markets (carriers) to
obtain insurance quotes on behalf of the Company.
In many cases, the incumbent broker will be “given” the
Company’s incumbent carrier(s), and a competing broker will be
allowed to approach the rest of the market. If more than two brokers
are involved in the evaluation process, the carriers are divided up
among the various brokers using a variety of often arbitrary methods
to determine how they are allocated. Then, whichever broker brings
back the best pricing becomes (or remains as) the Company’s broker.
Problems
On its face, the concept of market selection/splitting appears to make
sense. Intuitively, one would think that every broker in the process
gets a fair shot and the competition will generate a natural winner
with the Company obtaining the best possible pricing. In reality,
we believe this process is not the most effective for either the
Company or the brokers involved, and does not ensure that the best
options are necessarily obtained by the “best” broker. Some
reasons for this are as follows:
- The incumbent carrier (and, thus, the incumbent broker) wins
a significant majority of the time. Unless the Company has had
a very bad loss history with the incumbent carrier, that carrier
is extremely likely to beat or at least match any price and terms.
The initial sales and underwriting costs have already been
incurred by the incumbent carrier and they are already very
familiar with the account. As such, it is more efficient for them
to underwrite the renewal. Incumbents also have presumably built
up a “bank” of profits on the account, which give them more
cushion to be price competitive. Almost everyone likes and values
long-term relationships and jumping around from insurer to insurer
is never a good idea, so a tie (or close loss) usually goes to the
incumbent carrier.
- Identifying the most competitive carriers may not be obvious
prior to the marketing process. There will certainly be times
when alternative options will emerge with which the incumbent
carrier can’t or won’t compete. However, if brokers are
assigned and/or forced to choose carriers before the process
starts, it is very possible that the best option will come about
because of the carrier assigned, not because the broker assigned
to that carrier did a better marketing job.
As brokers, we certainly have a feel for which carriers prefer to
write business in certain industries, geographies, and client
sizes. However, since these preferences are constantly changing
based on a carrier’s performance, loss experience, concentration
of insureds, etc., the best price may come from an initially
unexpected carrier. If the broker is not empowered to approach all
markets simultaneously, they may not be able to obtain the best
price even if they do the most effective job.
- Inconsistent marketing can least to suboptimal results.
Each broker involved in a given marketing process is likely to
have some differences in its submission. While the underlying
application, financial information, and loss history should be the
same, how each broker presents the opportunity will (and should)
vary.
There may be a carrier who would otherwise have the highest
interest in the Company’s business, but received a submission
with little “value added” from the broker in terms of
describing the Company’s business in detail, explaining
mitigating circumstances surrounding large losses, and elaborating
upon favorable quality control or other risk management practices.
Thus, the carrier does not present its best quote and the Company
loses out.
Certain, less scrupulous brokers have also been known to play
games with submission data. These brokers may present reduced
sales estimates, lower payroll data, and edited claims information
to carriers in order to depress the initial quotes. Then, they ask
for forgiveness from the Company after winning the business once
the final premiums are increased based upon the actual data.
- Leveraging carrier quotes and coverage terms against one
another becomes more challenging. As quotes come in from the
marketplace, they will include not only premiums, but varying
coverage terms and conditions. If a single broker has conducted
all of the marketing, leveraging one proposal against another to
create the best combination of price and terms is far easier than
trying to do so across multiple brokers. Further, if a competing
broker initially brings the best proposal and the incumbent
carrier is willing to match it (with the incumbent broker), which
broker should rightly “win?”
Recommended Approach
At the end of the day, the carriers determine the price and terms of
insurance, not the brokers. However, choosing the right broker to
market to and negotiate with the carriers will ensure the best overall
results. We recommend evaluating brokers prior to any marketing
activities and selecting a single broker to consistently represent the
Company to all carriers. Pre-marketing selection criteria can include
the following:
- Understanding of your business – How well does the
broker understand your company’s business and what is their
ability to communicate your story? You will be able to tell
quickly if the broker “gets it.”
- Senior level commitment through the life of the relationship
– How senior are the professionals who will be marketing your
insurance and responsible to you from a service standpoint? Make
sure to ask if the senior people who show up in the room for the
initial pitch will actually be working on your account.
- Seamless team approach – Will there be a single,
integrated team committed to your account or will you be “handed
off” throughout the broker’s organization? If the brokerage
professionals who understand your business are different from
those who are marketing your insurance, the results are not likely
to be optimal.
- Responsive culture and dedication to client service –
How quickly does the broker respond to requests, questions,
emails, phone calls, etc.? Does the broker regularly go “above
and beyond” for you, the client? For a new broker prospect,
calling client references will be the best, and perhaps only way
to validate this.
- Access to and relationships with carriers – Does the
broker have access to and strong relationships with all relevant
carriers? Don’t be afraid to ask for and check carrier
references too.
- Expertise in managing complex situations and strategic
initiatives – Does the broker have demonstrated capabilities
in managing the insurance aspects of acquisitions, liquidity
events (e.g., IPO), geographic and product expansion, and other
strategic and financial initiatives? If your company is dynamic
and anticipates meaningful change and growth, make sure your
broker can handle it.
- Thoughts on existing program – What recommendations
does the broker (incumbent or new) have to improve your program?
This could include thoughts on not only pricing, but limits,
structure, policy terms and conditions, etc.
T H E P A R T N E R S ’ P E R S P E C T I V E
