Strategy Needed When Changing Brokers

First is the conceptual broker selection, when two or three brokers are invited to present their credentials. This short list may include your current broker.

The brokers are told not to go into the market to get price quotes and not to identify your company by name. This is important, because once a broker submits your companys name, the insurer may assume you have already made the appointment. This can delay the application process if you later choose another broker, as "broker-of-record" letters may have to be obtained.

In a conceptual broker selection, the winner is the broker who articulates the best renewal strategy, documents a proven track record in placing business under hard market conditions, and who is best qualified to deliver the kind and level of insurance, claims, loss control and risk management support services needed.

Second, a broker or brokers can be selected through a bid-specification process. The brokers invited to participate are initially given the same kind and amount of information about your property-casualty insurance program and risk exposures as in the conceptual selection. They are also told not to present themselves as your broker to any insurance companythey may only "broach" the opportunity to quote.

To keep all the brokers from knocking on the same door, you must assign them to specific insurers.

In a broker-bid, the winner is the broker who delivers the lowest prices (for comparable coverage) obtained from the insurance companies to which they were assigned. This sometimes results in a split decision. For example, the broker with the best property proposal may be awarded the property business, and another broker, the casualty business.

Sophisticated buyers may even invite direct writers that do business without the intermediation of a broker to submit proposals.

Here's an example. During the summer of 2000, at the very beginning of the hard market cycle, we acted as coach and counselor to the property manager of an owner-manager of shopping centers.

Spurred to action by poor representation in a claim dispute with their insurer, this customer wanted to make a change. With our advice, they invited four brokers to compete in a broker-bid.

The insurance company assignments were easy, each broker asking for an adequate number of different insurance companies to make it a competitive game. The results were surprising, however.

The broker with the lowest property quote had the highest liability rate, and the broker with the highest property quote had the lowest umbrella rate. The other two brokers delivered quotes that didnt make any sense. We were surprised how scattered the rates were. As we now know, this was the beginning of the hard market of the new millennium.

Our customer decided to pare the list of brokers down to twoand select the one with the best conceptual proposal. After appointing a new broker via a broker-of-record letter, the customer was reconciled to staying with the same insurance company. The amount of the claim dispute was far less than the increase in rates they would have had to pay.

Fast-forward to 2002, when we advised an association of non-profit agencies on the selection of an insurance broker to put together an insurance program for its members.

The cornerstone of a sponsored insurance program is the support of reinsurers that provide capacity to the licensed insurer that sets the rates, issues the policies and pays the claims. Sponsored programs are usually accessed through an exclusive arrangement with a wholesaler or insurance broker.

We commenced the assignment by identifying the available programs. We did this by visiting the Web site of the National Risk Retention Association, NRRA, at www.nrra-usa.org. Why start there? Because most program business is underwritten by risk purchasing groups organized under the federal Liability Risk Retention Act.

Risk purchasing groups may solicit commercial general liability, professional liability and other types of liability insurancenot workers' compensation or automobileeither directly or through agents.

While property insurance may not be written by a risk retention group, the sponsors sometimes negotiate the exclusive right to sell property insurance through a national insurance carrier.

There are literally hundreds of risk retention groups and sponsored insurance programs. Since your broker may be unable to gain access to them, however, you may not know about them. An essential part of your renewal planning should include a survey of these ART markets.

Our non-profit group was disappointed when they were greeted with a cold shoulder by all three brokers who had insurance programs. Why? Because the policy-issuing carriers had lost their reinsurance capacity and were rationing the dwindling supply to their long-standing customers.

The clients disappointment changed to resolve. They made the bold decision to form their own risk retention group.

A conceptual broker selection process was utilized to select the firm with the best array of program design, actuarial pricing, servicing carrier selection, and reinsurance placement and market introduction capabilities.

At this time, the non-profit group is raising capital to form an insurance company to reinsure its members property exposures. A risk purchasing group is planned to provide commercial general liability insurance.

Other broker selections recently completed illustrate the depth of emotions our customers are experiencing.

A business purchased by one of our investment companies was unable to get the sellers broker to provide continuation of coverage on a standalone basis. We were fortunate to help this harried customer find and select a local agent who placed the businessbut at much higher rates.

We recently advised another client on a conceptual broker selection that was prompted by internal problems at the clients incumbent brokerage. A conceptual approach was necessary because of the unique nature of their exposures and the narrow market channel through which their business was placed. Considerable political capital was placed on the line by this clients risk manager due to ties between competing brokers and upper management.

In yet another example, we pitted three brokers against the incumbent who has an exclusive insurance program. One broker withdrew, unable to get quotes. The second broker came in with one startlingly high quote. The third broker is two weeks past the deadline but still hopeful. The incumbent hasnt released its renewal quotes either. So we sit and wait.

Surprise, disappointment and anger are emotions that need to be used constructively in this market. They can lead to resolve and reconciliation. Lessons learned can lead to empowerment next year.

And remember, as unpredictable and inconsistent as prices appear today, a return to a soft market is inevitable.

Douglas H. Hartman, ARM, is president of Montclair Risk Advisors in Upper Montclair, N.J.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 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.