Expert Commentary

A Broker's Value

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.

February 2005
  • 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.


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.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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