Why Choosing an Insurance Broker Isn't as Easy as "Whoever Brings Us the Best Price Wins"
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 company 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 company 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 insurer. 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 insurers for quotes to create a truly level playing field.
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 (insurers) to obtain insurance quotes on behalf of the Company.
In many cases, the incumbent broker will be "given" the Company's incumbent insurer(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 insurers 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.
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 insurer (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 insurer, that insurer 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 insurer 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 insurer.
- Identifying the most competitive insurers may not be obvious prior to the marketing process. There will certainly be times when alternative options will emerge with which the incumbent insurer can't or won't compete. However, if brokers are assigned and/or forced to choose insurers before the process starts, it is very possible that the best option will come about because of the insurer assigned, not because the broker assigned to that insurer did a better marketing job.
As brokers, we certainly have a feel for which insurers prefer to write business in certain industries, geographies, and client sizes. However, since these preferences are constantly changing based on a insurer's performance, loss experience, concentration of insureds, etc., the best price may come from an initially unexpected insurer. 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 an insurer 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 insurer 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 insurers 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 insurer 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 insurer is willing to match it (with the incumbent broker), which broker should rightly "win?"
At the end of the day, the insurers determine the price and terms of insurance, not the brokers. However, choosing the right broker to market to and negotiate with the insurers 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 insurers. 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 insurers - Does the broker have access to and strong relationships with all relevant insurers? Don't be afraid to ask for and check insurer 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.