Appointing the right insurance broker for your businessJanuary 19, 2018
This issue of Strictly Risk is the first in a series of articles taking you behind-the-scenes of the insurance industry to shed some light on the risk management and insurance techniques that businesses use to protect and strengthen their balance sheet and improve their bottom line.
Responsibility for taking steps to prevent risks negatively impacting an organisation’s balance sheet does, of course, fall to its management. A well-managed business will conduct a ‘risk audit’ to identify all the risks to which the business is exposed. This information will then be used to compile a ‘risk register’. A risk that appears on the risk register can be managed in two ways. It can either be retained and managed by the business (known as ‘risk retention’) or it can be transferred to a third party, usually an insurance company (known as ‘risk transfer’). Developing a comprehensive risk retention and risk transfer strategy and delivering a plan to implement it is known as ‘risk management’.
Organisations’ balance sheets are under increasing scrutiny as investors, funders and other stakeholders strive to minimise their own risk. The management of an organisation needs to be able to justify its risk retention and risk transfer decisions and this process of justification is now a fundamental element of good corporate governance.
Unless an organisation employs an experienced, senior-level risk manager it is likely to be heavily reliant on the services of its insurance broker for its risk management. So, it is critically important for an organisation to secure the services of the right insurance broker. Appointing the right broker demonstrates to the wider world that the organisation is committed to risk management. Provided the appointment is on the right contractual terms, it will also increase the likelihood of an organisation achieving a robust risk management strategy and an effective insurance program. If an organisation makes the wrong appointment, there is a much greater chance of a financial exposure adversely impacting the organisation’s balance sheet and this will seriously undermine its credibility.
But as anyone who has been involved in a broker procurement exercise will know, identifying, selecting and appointing the right insurance broker for a business can be a tricky task.
Whilst many organisations seek to handle a broker procurement process in-house, more and more are now turning to specialist procurement experts to help with the exercise. This seems to be driven partly by corporate governance (the independence of an external adviser) and partly by a genuine interest in leveraging wider market knowledge to identify best practice and best value for money.
There is evidence to suggest that an independently-managed and competitive broker procurement process results in a more aligned client and broker relationship, a better controlled and confidential process and potential fee and premium savings. What is certain is it saves organisations significant management time and brings the benefit of a wide range of market knowledge and experience to the table.
Where an organisation wants to (or must) conduct a tender for the appointment of its insurance broker at the end of the current broker’s contract period, an independently-managed open market competitive tender process is likely to be the best way to establish a fair and level playing field in the eyes of the broking world. This will ensure the greatest possible engagement from the most suitable broking firms in the market and should lead to the creation of a successful partnership between the organisation and its broker.
It used to be the case that organisations, even the very biggest, would use a single broker to place all their insurances, on the basis that nothing would fall between the stools. This pattern has changed. There is now an increasing use of specialist brokers for specialist risks such as D&O cover, aviation risks, financial risks and cyber. There is no right or wrong answer on this and it boils down to the capabilities of the broker being selected and the nature of the risks being transferred. Most of the global players now have specialist teams under their umbrella and yet there is perhaps no substitute for the undiluted focus and expertise of a broking firm dedicated to one or two insurance lines. The secret is to craft the procurement process to accommodate all options and, where appropriate, identify the need for a specialist candidate as part of the tender selection process.
The timing of an insurance broker review is dictated by two factors – the current broker’s contract renewal date and the organisation’s insurance renewal date. Too often, organisations allow the two dates to coincide which makes it more difficult to move broker. Whilst it is uncommon for an outgoing broker to create mayhem in the lead up to an insurance renewal, if they know they are about to lose the account, it certainly increases the chance of this happening. Where there is a common date position, there are effective ways to remedy this, which involve negotiating an extension to the current insurance program. Ideally, an open market competitive tender should be started at least 6 months before an insurance renewal date so that the appointed broker has at least 3 months before the insurance renewal date to place the new insurance program that they will be managing going forward.
So, let’s assume you have decided to use a broker procurement adviser to project manage an open market competitive tender exercise for your organisation. What should a good process should look like?
Step 1 – Checking your current contractual position This sounds obvious, but it is essential to get legal advice on the contract with your current broker. The most important things to seek clarity on are the termination provisions, ownership of intellectual property in policy wordings, IT system dependency, data migration and hand-over support.
Step 2 – Establishing your service needs Using best practice methods, your adviser should help you clarify and refine your specific service needs. This usually involves a detailed workshop with selected members of your insurance and financial teams. The purpose of the workshop is to secure a clear understanding of your current risk retention and risk transfer strategy, the structure of your existing insurance program, how your account is currently serviced, any recent or planned changes in your business, any significant claims issues and your internal risk management policies and procedures. This is the opportunity to consider areas that you might want done differently or improved. After all, the last thing you want is to replicate something that is not working well.
Step 3 – Identifying suitable broker invitees Your adviser should be able to use wide market knowledge to help you identify the most appropriate brokers to invite to tender for your business. The list will usually include your existing broker. The key is to include brokers who are likely to understand your sector, be able to support your business and price competitively.
Step 4 – Preparing the Invitation to Tender (ITT) An ITT document will be created to issue to the chosen brokers. This will set out the tender process and timetable, information about your business, your risk management strategy, your specific service needs and a summary of your insurances and claims information. It will factor in any procurement rules peculiar to your sector and, where relevant, any public procurement rules.
Step 5 – Issuing the ITT Your adviser should take full responsibility for securing confidentiality agreements from the chosen brokers, issuing the ITT and managing and controlling any access to the insurance market. This last item is critical because you do not want to spoil the market and potentially damage your reputation by having your program hawked round the insurers before you have even chosen your broker.
Step 6 – Creating the assessment criteria Your adviser should help you create the assessment criteria for the choice of broker and establish your decision-making process. Key assessment criteria should focus on the broker’s ability to demonstrate (a) an understanding of your business and industry sector (b) an ability to deliver value for money (c) a deep knowledge of the relevant insurance markets (d) good administrative systems, controls and documentation (e) an ability to be innovative (f) the availability of a dedicated quality team (g) a track record of delivering clear and rich management information and (h) outstanding team-specific references.
Step 7 – Broker Q&A meetings Shortly after the ITT has been issued each broker will be allocated time to meet with you for a Q&A session, so they can clarify any issues arising from the ITT or otherwise.
Step 8 – Assessing the ITT responses By applying the agreed assessment criteria, brokers will be shortlisted to formally present and undergo an intensive Q&A session.
Step 9 – Reviewing broker references Your adviser should conduct a rigorous review of client references for the shortlisted brokers, including a detailed interview with at least one referee from each broker.
Step 10 – Formal presentations Each shortlisted broker should be given the opportunity to present to your decision-making team to answer any questions on their ITT written responses. Your adviser should chair these meetings (in a non-voting capacity) and facilitate an open and thorough testing of the propositions.
Step 11 – Decision making and selection By applying the agreed assessment criteria and the detailed scoring matrix agreed with your adviser, you should now be able to select the best broker for your business from the shortlisted candidates.
Step 12 – Formalising a new service agreement Once you have chosen the broker you would like to appoint, perhaps the most important part of the process is to codify the terms of the appointment in a detailed service agreement. A good service agreement should capture comprehensively the services to be provided and the required service levels, fee structure and payment arrangements. It should also set out the key performance indicators by which you can monitor and measure your broker’s performance throughout the contract period. Other key issues to watch out for are limitations of liability, counter-indemnities, change of control provisions, data protection and IPR ownership provisions and, importantly, termination and hand-over provisions.
By getting the process and the contractual position right, you should end up with a very powerful tool with which to manage your insurance broker relationship on an ongoing basis, fulfil your management responsibilities and, importantly, safeguard your balance sheet and stakeholders.