The current situation
Today’s competitive pressures are forcing businesses to scrutinize the price they pay for all products and services and to evaluate their professional relationships like never before. Property and casualty insurance and risk management services are no exception.

Traditionally, many midsize companies have held the belief that the best way to drive down their insurance costs is by conducting a “bid” process in which multiple insurance brokers are invited to compete and submit quotations.

Competition is an essential tool in helping buyers evaluate professionals and establish price/value relationships. However, in today’s insurance marketplace, the bidding process is no longer the best way to achieve the optimum results and can often even be counterproductive.

Inherent weaknesses in the bid approach
Companies that rely on a bid process seldom achieve optimum results for their efforts because the system simply works against them. There are a number of reasons why.

Like most businesses, insurers are looking for ways to increase productivity and decrease transactional costs. As a result, underwriting departments have cut staffing and increased workloads. The reality is the underwriters who decide whether or not to write your business and at what cost simply don’t have time to give every account their best effort. Therefore, they choose the new business opportunities they work on very carefully. 

If underwriters see a particular account is being shopped throughout the insurance marketplace by multiple insurance brokers, they feel the chances of obtaining the business are slim. As a result, they have little motivation to give that account their best effort.

Also, insurers will only work with one broker on commercial property and casualty business. The broker they deal with is the first one who contacts them about a particular account. This takes control out of the insurance buyer’s hands and leaves it up to the system that rewards the broker who “blocks the market” first rather than the broker who can deliver the best result.

To avoid the appearance that their business is being shopped throughout the marketplace, some buyers opt to assign specific brokers to specific markets. While this does reduce market chaos to a certain degree, there are drawbacks to this approach as well.

By assigning insurers, the buyer may not match the brokers with the markets with which they have the strongest relationships. Dividing the markets limits the brokers’ ability to communicate with all of the insurers and thus negotiate the best terms possible. When insurance markets are allocated, the brokers lose the ability to leverage the most aggressive quotes against each other.

When brokers are asked to bid, coverage is often compromised in favor of price. All too often, it is incumbent upon the insurance buyer to pinpoint potential coverage deficiencies. To compound the problem, proposals are typically presented in a way that makes it difficult for buyers to make an “apples-to-apples” comparison between programs.

In competitive bid situations the emphasis is typically on the lowest premium. While it is important to take premium into consideration, it is critical for insurance buyers to understand and stay focused on the “total cost of risk”.

“Total cost of risk” takes into account all those costs associated with a company’s insurance and risk management program. These expenses include losses that fall below a company’s deductible or within a self-insured retention; uncovered losses; and the administrative costs required to manage the program. It also encompasses lost productivity and retraining expense. The reality — the premium is only a small percentage of a company’s total cost and often the lowest premium can result in the highest total cost.

When most midsize companies buy insurance they combine the choice of the broker and the insurance carrier into a single decision. As a result, they often end up compromising one or the other. 

Can businesses obtain better results by doing things differently?
In today’s insurance marketplace, the best way to ensure optimum results is to “unbundle” the buying process. That means separating the broker decision from the insurance company decision. This gives the company the opportunity to ensure it has the freedom and flexibility to choose the best possible broker and, subsequently, the best possible insurer for its particular needs.

Businesses should look at the selection process in two steps. The first step is choosing the insurance broker; the second is picking the insurer. Some buyers may have concerns that the sequential approach slows and complicates the process. In reality, however, it streamlines the process. By selecting a broker first, the broker handles much of the fact gathering, coordination and analysis that would normally fall to the buyer.

Choosing the right insurance broker
All insurance brokers are not created equal and are not necessarily right for you. To help obtain the optimum results from broker competition, there should be a structured evaluation process. This helps create a level playing field and facilitates a fair and thorough comparison of the brokers’ capabilities. These should include, but not be limited to, a broker’s expertise, accessibility, depth and quality of services, and proven results with your size and/or type of business.

Once a broker is selected, the broker can then work with you to conduct competition among various insurance carriers. In that marketing project, it is the broker’s responsibility to:

  • Orchestrate the competition and design the Requests for Proposals (RFPs)
  • Structure the proposal and evaluation process in a manner that facilitates an “apples-to-apples” comparison of carriers
  • Make sure all markets receive the same information
  • Present the client’s business to insurers in the most effective way
  • Use their marketplace knowledge and relationships to negotiate the optimum terms and conditions from each carrier
  • Provide additional insight on carriers’ financial service and capabilities, strength and past performance
  • Deliver a comprehensive proposal with recommendations
  • Once a selection is made, design a tailored risk management and service plan for the next contract period
  • Provide ongoing critique and executive communication on the value and effectiveness of that plan

Conclusion
Competition between brokers and among insurance companies is an essential tool in helping businesses learn what is available in the marketplace. However, properly-managed competition is the best way businesses can assure they receive optimum value for their insurance program. Choosing a trusted broker partner First and insurance company Second can help you gain the competitive edge.