A Broker's Value
February 2005
To determine the value of insurance brokers,
the enterprise needs to know what it wants. There should be an assessment of
where the risk management function is currently, where it wants to go, and when.
by Gary
J. Bausom
Bausom & Associates, Inc.
- The value proposition is not a simple black
and white answer …
Even in today's rapid-fire business environment, a thoughtful risk or financial
manager will return to core fundamentals to realize solid results. A good portion
of the assessment needs to be based on the enterprise goals and the major concerns
of senior management. This review will likely encompass risks—both insurable
and noninsurable. After considering the appropriate risk retention level, insurable
risks are reasonably straightforward. It is important to consider the priorities
of:
-
Mitigating and managing risk
-
Seeking adequate asset/liability protection
-
Credit quality of underwriters based on the insured's enterprise standards
-
Pricing of the risks transferred, with underwriters that collect premiums
as well as pay claims fairly
Keep in mind that pricing is market-driven and is not controlled by a single
enterprise. Pricing is affected by such macro issues as industry loss experience,
overall availability of capital/surplus, and interest rate levels. Most risk
managers understand that 90+ percent of insurance companies' earnings result
from loss reserve float. The higher the interest rates, the more likely insurance
pricing will be soft.
Risk managers should not accept credit for downward pricing trends or the
blame for increasing prices. The risk managers who internally "sell" their control
over pricing are more likely to find difficulty when their actions fail. Do
risk managers think that corporate treasurers individually control or take blame
for changes in interest rates?
Beyond pricing, risk managers need to focus on materiality of risk impact
and the key types of risk, such as supply chain, business interruption, directors
and officers (D&O) liability, and products/completed operations risks. What
is important to the enterprise and management?
How Much Compensation for the Broker(s)?
Is there a clearly written work-plan identifying the broker's contributions
to the enterprise objectives? Risk managers need to focus on their goals and
determine the role of staff, any consultants, and specifically what the broker(s)
should accomplish. It is important to think about the roles and expected involvement
of each of the parties. At year's end, the risk manager will presumably need
to report progress and results of the efforts and funds expended.
If a broker is, for the most part, obtaining insurance for the enterprise,
that is an important function and has a value, but that is likely to be only
a part of what the risk manager is expected to deliver. A risk manager has to
allow ample room in the budget for other deliverables.
There seems to be a great deal of effort expended by risk managers on the
method of compensation: fees, commissions, of some hybrid derivative. Perhaps
more effort should be expended near the year's end reviewing the stated objectives
and what was actually delivered. This should be an excellent basis to adjust
the compensation (as well as the objectives) for the following year.
The risk manager must remember not to "paint his or herself into a corner"
because they have entered a new contract year. Agree, up-front, that the upcoming
year's agreement needs to be reached by a predetermined date and, in the interim,
a prorated amount of last year's compensation can be paid. An adjustment can
be made, as necessary.
Any broker (or other adviser) who delivers on the expectations of the enterprise
is worth far more than a service provider with lofty goals whose results fall
short.
Who Is on Your Brokerage Team and Why?
People—not institutions—make things happen. Any firm is only as good as the
people who represent it. The service level of a given brokerage firm (or other
adviser) can vary widely, depending on specific individuals involved.
It is important for risk managers to spend time determining if the current
service team has the right individuals. The makeup of the individuals—in terms
of their experience, set of working relationships, and style—will determine
the degree of "fit" for the client. If the service team is not the right "fit,"
and the service firm represents that they do not have other individuals with
the desired attributes, then this may be the wrong broker.
Risk managers need to be on top of the "fit" issues; otherwise they may have
a difficult time explaining why the overall objectives were not accomplished.
Summary
Most risk managers believe they are in charge, so take charge! Do not accept
the standard commodity approach if it does not fit the need. Drive the value
of your personal stock up with the senior management of your enterprise by delivering
as you have represented.
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