The New Definition Of Value

The insurance industry has long struggled with the concept ofvalue.

Historically, we have defined value as a direct function ofprice. As most other industries have learned, there is a greatdifference between the price of a product and its ultimatecost.

Because of this, we have found ourselves time and time again ina vicious price cycle that serves no ones best interest. Eachsuccessive cycle has done more damage to the stability of ourindustry.

The reason for our continued price competition is simple. Ourindustry has done a very poor job of differentiation outside of thecommodity. Therefore, as carriers and brokers, we have focused onthe price of the product, not the ultimate impact to the endusers–our clients. Likewise, our clients have always focusedprimarily on the price of the insurance program as a measurement ofappropriate representation.

I fully understand the impact of the current hard market onprice competition. Frankly, there isnt much competition. Thats thepoint. In the historical insurance cycles, somebody always loses.Right now, our clients are the losers.

This is not the basis of long-term relationships based upontrust or value. A groundswell of client discord is building thatmay demonize our industry for years to come.

How did this happen?

It is very simple. As an industry, we have never given ourclients a basis by which to judge us, other than price or coverage.We have missed the pointthat clients are demanding tangible valueoutside of the commodity. Because of this oversight, we haveconstantly fallen back to the same benchmarks that are comfortableand easy for us. This leads to a continuation of the “lose/lose”industry cycle.

There is only one answer to our dilemma. We need to be able todemonstrate our value to clients. How? By showing our clients theimpact we can make on their balance sheets by impacting theircosts. The vehicle we must use is Total Cost of Risk, or TCOR.

TCOR is a concept that has grown out of the risk managementarena. For years, astute risk mangers have understood theinteraction of insurance price with all other aspects of theirprograms financial impact. The insurance was simply a vehicle forfinancing a risk, while other services (i.e. loss control, claimsmanagement and information) had the ability to impact costs.Therefore, when determining a broker or carrier value, performanceis judged by the ability to deliver resource capabilities that willreduce costs.

In order for TCOR to be successfully integrated inside ourindustry, there are several shifts that must occur. All three sidesof the relationship–brokers, clients and carriers–must embracethese shifts.

Broker shifts.

Brokers that serve the middle and upper middle market must learnhow to impact costs in many ways. This impact should take the formof resource capabilities that can be translated to reduce costs onthe buyers income and expense report. The final results must bequantified and benchmarked against the costs a buyer would haveabsorbed without the resource utilization.

This requires a complete understanding of a buyers businessoperation and all of the ways they encounter expense for risk. Thesuccessful agency or brokerage must build a sales and clientstrategy that focuses on the delivery of the TCOR valueproposition.

Carrier shifts.

As an industry, we have become inwardly focused on loss costs,reinsurance and expense ratios. These factors have led us into afeeding frenzy on both sides of the cycle. Either prices cant go upquickly enough or drop fast enough.

We have forgotten our impact on the end user and made it allabout us.

Carriers have a tremendous depth of resources that needs to bevalued and delivered to our buyers. The delivery of these resourcecapabilities, coupled with a brokerage community that understandshow to utilize them and demonstrate their impact, is the onlyanswer to stability.

This allows a carrier to create profits and long-term clients byleveraging existing resources.

Client shifts.

Clients must shift their expectations.

One of the major catalysts for the constant price competition isthe expectation we have created in our clients. For decades, theproperty-casualty industry has directed buyers to judge usprimarily on our cost of insurance or risk financing.

Many of our clients are beginning to find this methodologyprimitive in light of rapidly escalating prices. When these clientsare approached from a position of TCOR, they are extremelyreceptive. It speaks to their specific concerns.

It is time that our entire industry adopt this model of TCOR. Itis the only way that we can survive in the long term. It serves allconstituents: carriers, brokers and clients.

By using a TCOR model in the middle market, we are able toestablish value and differentiate ourselves.

Rob Ekern is President of C.R. Ekern & Company, aPhoenix-based consulting firm that works with agents and brokersnationwide. He can be reached at [email protected].

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 11, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.