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IRMI Update—Issue #171

An E-mail Newsletter for Risk and Insurance Professionals
ISSN: 1530-7948
October 17, 2007

In This Issue

Message from the Editor

Colleague,

The other day, a friend called me for some help giving advice on homeowners insurance to his CEO. My friend, a seasoned risk manager, knows the ins and outs of complicated commercial lines coverages but confessed to me that he knows practically nothing about personal lines insurance. He was nervous about helping his CEO but, as his company's "insurance expert," he felt compelled to do so. Of course, we were able to help him using information from Personal Risk Management and Insurance, the IRMI reference manual on this topic.

This incident made me realize that many readers of IRMI Update may be in the same boat. You can confidently handle risk management or commercial lines insurance questions or issues, but do you feel much less secure in explaining whether your client or CEO should be concerned about coverage for a new Oriental rug or personal watercraft? And what about the expensive jewelry she is taking on her European vacation?

A subscription to Personal Risk Management and Insurance can provide the confidence to quickly answer most any question on virtually any type of personal insurance—from auto to watercraft policies. The three-volume set (also available online in Sage and IRMI Online) is the most complete and up to date reference available on personal lines insurance. The subscription fee is nothing compared to the points you can earn with your clients or executives when you put the information it contains into play. Learn more about Personal Risk Management and Insurance.

We received many responses to my last message, regarding how many brokers to use. Most advocate choosing one firm that can best meet an organization's needs. However, several readers make excellent cases for using more than one. We've reproduced many of these opinions for you below. I think you will find them interesting.

Thank you for subscribing to IRMI Update.

All the best,

Jack

Jack P. Gibson, CPCU, CRIS, ARM
President
IRMI

Risk Tip

Employ Strategic Planning—The strategic planning process is usually applied to business units that focus on generating a profit from the goods and services they provide to customers. Yet, the process can readily be used for a cost center like risk management because services are delivered to customers—the operating units. Developing a strategic plan for risk and aligning that plan with the organization's strategic plan can demonstrate the value that risk management brings to the organization.

In developing a strategic plan, it is easy to get sidetracked in the tactics of everyday risk management. Although these are important to effective risk management, the focus of the planning process should be overriding strategic issues such as:

  1. Organization and placement of the risk management function within the corporate structure. For example, how is it aligned within the organization? Does it support efficient accomplishment of risk management goals and the organization's business strategy?
  2. Risk retention capacity. For example, what is the organization's appetite for risk and ability to retain risk? Is that capacity being applied in a logical and consistent fashion?
  3. Scope of the risk management function. For example, what aspects (i.e., risk financing, claims management, etc.) are included? What should be included?
  4. Use of insurance markets. For example, how effective is the current risk transfer program structure? How are insurers selected?
  5. New and emerging risks. For example, are mold, terrorism, e-commerce, privacy, and other developing exposures being addressed?
  6. Targeted challenges. For example, what are the most costly elements of risk? What risks have the most significant potential for catastrophic loss?

Drawn from Practical Risk Management, Topic A-22, Strategic Planning for Risk.

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New Expert Commentary

There are now nearly 1,000 risk management and insurance articles on IRMI.com. Below you'll find summaries of some recent additions with links to the articles.

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Your View—One Broker is Usually Most Efficient

IRMI Update #170 discussed some of the pros and cons of using one broker versus more and asked readers for their views. Most reads agree that one broker is best for most accounts, but a few make a good case for using two or more. Read their views below.

  • I believe that whenever possible only one brokerage firm should be used. The reason is that separate types of insurance coverage do not independently exist in a vacuum, and there is often overlap between them that must be considered both for claims and underwriting. On the underwriting side, the same questions and issues about the company are often asked by underwriters across various types of insurance, and educating one brokerage as to the current facts and issues is easier than educating multiple brokers. On the claim side, I have seen claims that trigger both general liability and EPL coverage, fiduciary and D&O coverage, or tech E&O and GL coverage. Having a single broker to address (and be responsible for) both the claim and underwriting impacts of such events is helpful and efficient, especially for those insureds that do not have coverage counsel on call.

    —Nathaniel McKitterick, Partner, DLA Piper, East Palo Alto, CA

  • For a variety of reasons I don't think it's a good idea to only have one broker. One of the main reasons is that I believe the relationship between the broker and the company could become too close and the perspective of "what's best for the company" may be lost due to the closeness of this relationship. The ideal number would be two active brokers on the account. One would handle the casualty coverages along with the professional liability coverages. The reason: so the coverages could be weaved together to provide a comprehensive program that has looked at the intertwined exposures these lines of coverage present. The other broker would handle all the property lines of coverage and this would include motor truck cargo and other related exposures. Then a strong relationship with one or two other brokers should be maintained in the event your first two are not performing as expected.

    —Eric Shutek, Manager, Risk Management, St. Louis, MO

  • My recommendation would be to use one insurance agency instead of multiple agencies. We believe this approach allows us to produce the best results for our clients when marketing their account. Being able to leverage the entire marketplace allows us to provide the insured with optimal pricing and program structure. The insured needs to understand the difference between good and bad competition. Good competition is choosing a qualified broker that will create the most competition for the insured's insurance dollar out in the insurance market. Bad competition is when multiple brokers are used. Having multiple brokers can produce inconsistent data, decreased leverage among the carriers, and an unwillingness from the insurers to work with an agent who has not been appointed by the insured. If an insured wants to create competition among brokers then we recommend they do this prior to marketing their account. They should chose an agent based on a set of criteria that is important to them. For instance: strength of agency, similar clients, client service team, etc.

    —Chris Kolkhorst, Producer, McGriff, Seibels & Williams, Houston, TX

  • One broker is the preferred method, for the reasons stated, but also in order to prevent as many gaps in coverage as possible. Although many coverages have been standardized, there are still many companies that use propriatary forms. These may or may not provide coverage when different policies are used. By keeping all or as many policies as possible with one company and through one broker, this problem can be mitigated to a great extent.

    —J. Alan Johnson, CPCU, ARM, AIS, Agency Owner, The Johnson Agency, Madisonville, TN

  • I use several insurance brokers, some domestic and some foreign. One broker handles domestic insurance; another our foreign program; a specialty broker for aircraft; and anyone with a marine exposure should have a broker with expertise in marine matters. Our foreign subsidiaries purchase local auto, and some local propery insurance. Communications is hard work, especially where there is a language difference. And I wish I had an elegant solution for this problem. I consider the communications issue less of a risk than having a single broker handle everything even when he lacks expertise. I want the best possible policies first, and that means using specialty brokers where something other than standard GL; WC; and property policies are the issue.

    —Philip Guarisco, Risk Manager, Bay Ltd., Corpus Christi, TX

  • I would prefer to hire only one broker, but because the Commission is an Instrumentality of the State of Ohio, our insurance program must periodically issue requests for proposals. This invariably leads to choosing a program with at least three or four brokers. Obviously awards are based on policy terms and not price. Administratively it would be much easier to have only one broker working for you who could answer all of your questions and avoid a lot of duplication in underwriting.

    —Joseph Disantis, Risk Manager, Ohio Turnpike Commission, Berea, Ohio

  • I think it is best to have one broker representing an organization. It takes up less of the insured's time on the phone having to provide information to the broker for changes and policy renewals. An organization that needs to add additional insureds, or needs to present certificates on a regular basis will be able to get that done easier if all their policies are in one house. It is also easier to get better pricing as insurance companies offer more discounts when all lines of businesses are placed with a single carrier. There are of course exceptions to this rule and one might be if a company has a separate operation in another region that requires special knowledge that the broker doesn't have. But in general, it is best to allow one broker to handles all lines of business.

    —Eli Gillespie, Commercial Insurance Sales, Gillespie Insurance Services, Redlands, CA

  • In today's era, Risk Management entails complex risk assessment, risk transfer and asset protection techniques, due in part to globalization as well as regulation. I firmly believe that a firm needs to employ several brokers & agencies, picking one generalist along with several 'specialists' who are experienced in unique types of risk transfer.

    —John Koch, President, World Trade Consult, LLC, Memphis, TN

  • For most businesses, the single agent/broker relationship is the right approach. That said, the agent/broker needs to have sufficient expertise, market relationships and other resources to handle change and growth that an insured might experience over time. If an insured has special needs (e.g., international risk, aviation risk) it might consider a second agent/broker, or a single new agent/broker who has the resources to serve all needs. While some large insureds might have large risk management departments that can easily manage multiple agent/broker relationships. Most insureds do not, and rely on the agent/broker to handle many of the tasks that such "risk management departments" take on for large organizations. Multiple broker relationships for most insureds would prove inefficient in the long run.

    —Pat Dooney, Producer, Anchor Insurance & Surety, Inc., Portland, OR

  • I have worked with both situations. At one point at a prior employer, I was forced into a two broker arrangement. I found it to be cumbersome and difficult. In terms of needing assistance with specialties, a retailer can use a wholesaler with expertise in the area, for example D & O. At my current employer, one broker has had the City's account for 32 years. I have been here 8 1/2 years. The City has conducted broker/insurance searches several times in the 32 years and the incumbent was able to provide the best combination of price, coverage and service for the City, so the element of competition is still there. Because of that long relationship, the broker can provide excellent assistance in coverages and options. I would only go back to two brokers if forced.

    —Larry Krause, Risk Manager, City of Champaign, Champaign, IL

  • I have always operated under the school of thought that one insurance broker should be able to handle all your brokerage needs. Having two brokers in your operation does not create "healthy competition" as much as the unhealthy juggling of the redundant communication. If you want to keep your current broker on their toes have an audit of their services performed by a risk management professional who does not offer brokerage services. The audit should simply compare the actual services performed to what is in the written agreement with your broker.

    —John Tuisl, VP Risk Management, Kenny Cnstruction Company, Northbrook, IL

  • A client's overall interests are probably best served by a single broker relationship. The ability of such a broker to understand the full range of the client's exposures gives that broker a higher degree of success in eliminating gaps in coverage by integrating the various policies. In addition to receiving VIP client status by potentially providing that broker a larger revenue stream, this is the overriding consideration that justifies the use of only one broker.

    —Augusto Toledo, CEO, Accette Insurance Brokers, Inc., Manila, Philippines

  • Like many things in life there is no one solution for all. The difficulty is in getting the best advice/insurance procurement possible while keeping the brokerage force motivated over a number of years.

    If you pay them very little, thin fees, then you will eventually get thin advice. If you pay them too much it may motivate them for a while but the fear is that they will become complacent over time because you are not keeping them on their toes.

    Not all brokers are good at all roles so Risk Managers need to evaluate the other skills in the firm before awarding additional service. Just because a firm provides you a good price does not mean the coverage is as good as the price. The Risk Manager needs to know the difference and may want to engage an independent firm to review the insurance program design.

    You may need some loss control work for your organization which means that this is a good time for a RFP. Some very good boutique brokers that can serve your consulting and procurement needs do not have an in house loss control employee. Do you rely on the broker to pick a loss control firm for you or are you able to do this yourself? Does the broker know enough about what you do to be able to find the correct loss control firm? If they have a loss control employee, is this person qualified to review your risks (off-shore rigs?)

    Sometimes you need to breakaway from the insurance procurement world and dive into alternative forms of financing. Will all brokers be keen to tell you to move a portion of your business away from the brokerage? To get some good advice engage an independent consultant that does not procure insurance policies.

    The best advice is to consider what you need in terms of procurement, loss control, and risk financing and then engage the appropriate firm. One stop shopping at the grocery store is easy but we all know we do not get the best produce or meat at the large box stores, although the prices are usually pretty good.

    —Darius Delon, Risk Manager, Tonko Realty Advisors Ltd., Calgary, AB

  • Despite the fact that we at Aon are insurance brokers and may have vested interests in our standpoint to the question raised, we have great difficulties in finding good arguements for the use of more than one broker.

    If the client has decided to choose a broker with a world wide network, every sort of insurance service he needs will then be taken care of. This will be the situation irrespective of whether the need is of local Norwegian type or is of international nature.

    That the broker knows every aspect of the client's operations is vital for rendering ultimate service.

    —Knut Wikborg, Legal adviser, Aon Grieg AS, Oslo, Norway

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