How Can Buyers & Brokers Become A Match Made In Heaven?

Depending on which way premiums are headed and how quickly and effectively claims are being handled, insurance buyers always seem to either love or hate their brokers.

This perhaps is caused, at least to some extent, by the fact that most insurance buyers dont have a choice about using an agent or broker. Businesses typically cannot approach insurance companies directly, primarily because of state licensing requirements. They usually have to use an intermediary licensed to do business in their home state to market, place and manage the insurance products they use.

Agents and brokers often provide services in addition to arranging for placement and servicing of insurance coverage. The typical love-hate relationship between buyer and broker is epitomized in discussions about the true value of intermediaries.

I think most insurance buyers and risk managers agree that market knowledge is of critical importance, and intermediaries who understand the insurance marketplaceincluding alternative facilities and arrangementsare extremely important to the risk management equation.

Knowing which market is the best option for broad coverage at reasonable rates, plus the ability to help the buyer move into risk-sharing arrangements when appropriate, can be worth its weight in gold.

This was evidenced most recently by the turn of the market. If buyers didnt appreciate the value of a market-savvy intermediary before the turn, they certainly learned it quickly.

Most intermediaries who handle commercial clients, however, do a lot more than simply market and place their clients insurance coverage. In the best of situations, the intermediary becomes a valued appendage of the commercial client, working in a capacity similar to the corporate lawyer or accountant.

Good intermediaries may provide a variety of services, such as helping with risk assessments, interpreting coverage, analyzing losses and developing loss projections. They also facilitate claim adjustments, research technical exposure questions and oversee loss control and safety services.

How much these services are worth is well worth discussion time and often becomes the foundation of a well-defined and long-lasting business relationship. Risk managers need to maximize the value they receive from the relationship, and intermediaries have to earn enough money to make their efforts worthwhile.

Traditionally, intermediaries were paid commission as a percentage of the insurance premiums placed. This arrangement has two potential drawbacks:

Risk managers may feel it encourages intermediaries to sell more insurance and discourages them from considering alternative risk-treatment ideas.

When premiums rise, intermediaries may receive a windfall and, conversely, suffer unfairly when they plummet.

Such inherent conflicts have increased the popularity of fee-based service agreements in lieu of commissions. Fee-based compensation is thought to be fairer to both sides of the broker-buyer relationship.

But how is a reasonable fee established, and what types of checks and balances should a buyer institute to keep the intermediary working in their best interest?

Many intermediaries suggest that the fee negotiations begin with what would be earned in commissions. This is the minimum that would be earned and is required just to handle the account.

It seems more reasonable to me, however, to step back and first decide the value of the marketing acumen and coverage knowledge that the intermediary possesses and use that as the basis upon which to build the fee structure.

Market knowledge and understanding of alternative arrangements is critical to a successful partnership and remains the key to the value proposition. It should be the first element considered when structuring a service agreement.

Certain duties go hand in hand with the insurance piece of the intermediarys duties, such as reviewing policies and interpreting coverage, tracking claims, and assessing risks. Others, such as claims management, financial analysis, loss control, and loss and collateral projections usually are considered value added.

Intermediaries may offer a higher skill level in these areas and provide expertise in areas that otherwise would be lacking.

Once again its cost versus price. An intermediary that is particularly skilled in these areas may prove his or her value several times over in saved program costs.

When the buyers internal resources are constrained, the value in having the intermediary take over some of these risk management duties may increase dramatically. It may be more cost effective to pay the broker to handle these duties than to increase internal staffing levels.

The level of service must be clearly defined at the outset, however, and measurable goals built into the service agreement for it to work.

A good way to handle this is to itemize not only the types of services needed but also the deadlines for providing them. For example, quarterly claim reviews and collateral projections may be valuable for businesses with hefty general liability or workers compensation exposures. A property-driven account, however, may benefit from an annual claim review, with a rolling schedule of on-site property inspections part of the intermediarys services.

Regular status reports on service progress help to ensure the job that is being paid for is getting done. Its not a good idea to wait until the end of the year to discover that the claim reviews or property inspections that were agreed upon are months overdue for completion.

Incentives may up the ante of fee-based agreements. They can be an excellent tool for achieving high levels of performance as long as the intermediary really has control over the incentivized areas.

The real incentive, however, is for the intermediary to be retained because of the value added to the clients operation.

This cant be a one-sided arrangement. Even though they may not like to be reminded, buyers must be committed to the service arrangement or theres no chance of success on either side.

Im currently working with an intermediary on a problem claim in which the insured business failed to report a newly constructed building. You guessed itthe new construction was seriously damaged, and now the risk manager is scrambling for coverage.

The buyer failed to hold up her end of the bargain, but Im wondering what will happen to her relationship with the broker if the loss isnt paid. If the situation runs true to form, Ill bet the intermediary shoulders most of the blame in the end.

Diana Reitz a former insurance agent, is editor of the National Underwriter Company publication “The Tools & Techniques of Risk Management & Insurance” as well as the “Risk Funding” and “Self-Insurance” Bulletins, both available at www.nationalunderwriter.com/nucatalog.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 23, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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How Can Buyers & Brokers Become A Match Made In Heaven?

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