Couple of years ago I was given the responsibility for corporate, non-life insurance across a $10B group of companies. I welcomed the opportunity to combine risk-based quantitative decision making with insurance. Did it work? You be the judge, a year later the company improved the quality of coverage while reducing the cost of insurance by approximately 40%, which translated to $13M+ savings. How did we do it? Let’s find out together in a series of articles…
In this article I wanted to talk about one important aspect of insurance renewals – the relationship with the broker. So here are the 5 red flags I learned when selecting insurance brokers in US, EU, LATAM and CIS.
1. Selecting one best broker
Probably the biggest mistake I saw in the market was risk or insurance team running a tender for a particular renewal, selecting a single broker and then going to the market with that single broker. Huge mistake! The lies brokers tell their clients about limited market capacity, etc. are just hilarious. Brokers will do anything to avoid honest competition.
Selecting the best broker is an oxymoron. Because whether a broker is good or bad is not a risk management decision, it is a market decision. Broker is best when he brought best quality of coverage for the best price. How can you choose a broker before going to the market? That’s right, you cannot. The only sensible way to select the best broker is to shortlist 2 or 3, divide the available markets and let them bring the best coverage for the best price. So that’s exactly what we did on almost all significant renewals. Even when placing W&I insurance for an M&A deal in Switzerland (highly specialised product and a very narrow market) where we had just 2 markets who were interested in reviewing the risk, we still used 2 brokers. Let the brokers work do the talking and not their glossy proposals.
I will do a separate article on the 5 criteria to shortlist brokers.
2. Selecting a global broker instead of many local brokers
The second biggest mistake is not diversifying brokers and giving most or all insurance renewals to a single company, usually a global player. Huge mistake!
Broker relationships, just like any other investment, need to diversified across the insurance lines and time. On certain lines we would open tender with multiple brokers every year, on others once every couple of years. Don’t fall in love with your broker, they all offer more or less the same service, once you shortlist the good ones.
The second mistake I observed is getting your local broker office to engage their Asian or Latam office to place the overseas insurance lines. Huge mistake!
Brokerage is all about broker-underwriter personal relationship and long distance relationships don’t work, as we’ve proven time and time again. Broken telephone game doesn’t work when placing insurance. Insurance buyers, like us, need to talk to the insurance underwriters directly and we can afford maximum one intermediary. Whenever possible we would go direct to the local providers. Sometimes Broker A in Holland didn’t even know we were working with Broker A office in Swiss.
3. Believing anything the broker says without testing the hypothesis first
My general observation is that many brokers are just glorified bs vendors. Many sell promises and opinions, not facts and barely anyone back-tests their ideas. My team wasn’t nice, we went ahead and tested most hypothesis suggested by the brokers. And… you guessed it… most hypothesis proved to be wrong.
Every time a broker would propose an approach we would go ahead and test it in the market. They would claim combining risks together would lead to a better deal, we would price both options and prove them wrong, they would say underwriters prefer certain things, we would A/B test it and prove them wrong, they would claim the markets are hard (don’t they always) and 16% increase is best possible, we would go ahead and reduce the premiums by 23% and so on and so on. Quite tiring, so I slowly got read of all brokers who continued to bring us their “best practices” that had no evidence to support them.
4. Selecting the broker who don’t collect, process or understand claims data
Ok, this one was huge for me.
While brokers don’t realise that and bask in their own importance, they actually have very limited useful application for the business. They connect with the underwriters (most of them you soon get to know directly, so no longer need brokers), provide policy wording (any decent size broker can do that), claim manage (again, pretty basic skill) and, this the big one, consolidate, aggregate and analyse claims data to help business assess risks. The trouble is that out of every 5 brokers maybe 1 can actually provide the data we requested during the risk analysis. Most don’t store, clear or analyse the claims data they have.
To me, the decision making is very simple, unless a broker can provide cleansed data on the specific risks we are investigating, they get blacklisted.
5. Talking to BD instead of engineers
I didn’t realise at first but apparently brokers have sales reps or business development (you can see them at all RIMS, FERMA, PARIMA conferences pretending they understand risk management) and risk engineers. These two groups come with very different experiences and skill sets. So as a general rule I try to avoid BD people as much as possible or anyone who doesn’t intimately understand the nature of the risk we are transferring.
Share your broker horror stories in the comments.