RM Tools & Techniques

New Rules Can Avoid Problems with Brokers

By Diana Reitz

March, 2005

It's an understatement to say that attention has been directed lately to the role that brokers should play in obtaining the best insurance and risk management program that's available for their clients.

If nothing else, the Spitzer probe should cause corporate buyers of insurance to reassess just what they expect from their service providers.

It's also a good time to take stock of the responsibilities that the buyers' side has to make and keep the relationship effective, productive, and worthwhile for both sides.

There may not be a one-size-fits-all handbook covering the responsibilities that risk managers have for their role in the relationship, but there are some general behaviors that corporate buyers may want to cultivate but tend to overlook in the pressures of the rest of their job.

·         Know the difference between an agent and a broker. In insurance 101 we learn that agents represent the insurance company and brokers represent the insured. When I began my career, there was a difference between an agent's and a broker's license, with more extensive experience and educational requirements for brokers.

The difference seems to have narrowed in the last decade or so, however, with even state licensing laws referring to both groups as “producers.”

It may be further blurred by the fact that many independent agents offer extensive arrays of service in addition to placing insurance coverage and speak of themselves as representing the buyer and not the insurer.

Regardless of what they call themselves—agent or broker—vendors that pledge to represent the best interests of their clients should be held to that promise.

·         Provide timely, accurate information about your business and its exposures. Allow your broker access to your company so a complete exposure analysis can be done, and subsequently report changes when they occur.

I frequently talk with agents, brokers, and adjusters about problem claims they're working. Too often the claim is an issue because the client didn't report a change in exposure—or even complete exposure information in the beginning.

Corporate buyers have a responsibility to be sure that the information they provide is complete, timely, and accurate, or they must shoulder some of the blame when an exposure is not treated properly.

·         Negotiate a written service agreement with agents or brokers. Although such agreements frequently are used with accounts that are set up with fee-based services, they also are valuable for accounts written on a commission basis.

From program design through implementation and auxiliary services, it's always best to have it in writing. The agreement should quantify expectations and identify how fulfillment will be judged.

For example, the agreement may specify that quarterly written service completion reports be submitted to the corporate buyer so progress is gauged throughout the term of the agreement.

·         If fee-based services are provided, consider a formal incentive bonus structure. Just as with employee-bonus systems, these can be difficult to develop and implement because it is difficult to keep them objective and based on quantifiable accomplishments.

Such incentive bonus systems can promote above average service, however, when both sides have input into how they are set up. Sample bonus structures may be available on the RIMS Web site, and one is provided in the National Underwriter book, The Tools & Techniques of Risk Management & Insurance.

·         Regardless of whether the account is written on a fee-based or commission basis, incorporate a provision for an annual broker evaluation.

Just as with any evaluation system, buyers shouldn't wait until the annual review to gauge performance. However, an annual formal review can go a long way toward holding agents and brokers accountable for what they've promised and serve as the basis to reward good performers and penalize poor performers.

·Remarket the program for both broker(s) and insuer(s) periodically but not every year. And when remarketing, set the guidelines up front and stick to them.

Successful risk managers typically issue a Request for Proposals that outlines the needs and establishes the guidelines for quoting the program. Some risk managers issue two RFPs: one to use in selecting a broker, and a second one to establish the actual program. When this is done, the successful broker typically plays a key role in the insurer RFP.

Buyers who market their program every year get the reputation of shopping for price solely, regardless of whether they talk about the importance of service or not. A corporate risk management and insurance program is too complicated to market every year, and those who try to do so may eventually find that very few brokers, if any, are interested.

It usually is best to keep the playing ground as level as possible by providing the same information to all who are invited to compete. Those brokers or insurers that are creative should be rewarded, though, for going beyond merely responding to the Request for Proposal.

·         Know who you're doing business with and recognize that they may have financial relationships with some of the companies with which they place business. If part of the coverage is being written with non-admitted carriers, it may be prudent to ask questions about how and through whom the business is being placed.

There are a great number of independent wholesalers that place non-admitted business, but many are owned by retail brokers. Either can be a valid approach for an individual corporate buyer, but if transparency and independence are important, it's best to ask about these arrangements before entering into the contract.

Vendors may have financial interests in other sub-contractors that provide services to an account, and it is a good idea to ask for information about such relationships.

·         Buyers also should remember that nobody in the commercial insurance field needs to practice. If a corporate buyer decides to remarket a program, the buyer should actually be willing to move the business if a non-incumbent presents the best proposal.

All too frequently I've seen buyers allow incumbents to match a particularly competitive proposal, in effect punishing the vendor who was creative and developed a superior proposal.

Allowing an incumbent—whether agent, broker, or insurer—last look repeatedly can ultimately dry up the competition.

Buyers need to be just as forthright in their dealings with brokers as brokers need to be in their dealings with the buyers. Laying out expectations for both sides as candidly as possible before beginning a relationship, and then evaluating that relationship periodically throughout the contract's term, may prevent the types of problems now being probed from occurring in the future.