This is a guest blog post written by Zach Stock of Stock Insurance Group. For more information about Zach’s expertise, please visit: https://stockinsgroup.com/.
I was recently talking to a chief purchasing officer for a large global public company, and we were discussing how they go about handling their insurance program. I was very surprised to find that they continue to utilize an RFQ/RFP process to establish their global P&C and benefits program.
As we talked further about the process, it became clear that they view the brokers they work with as nothing more than order takers. They develop the specifications for their program, and then send it out to several brokers who race to block various markets and fight it out to try and get this client the best price.
On the surface, this seems like a good system. However, if you dig a little deeper you will find that for both a global publicly traded company and smaller private organization, this method ultimately leads to a stagnation in the risk management and risk transfer plans of these companies as well as leading to the creation of a negative perception by the insurance market.
Why does this approach fail?
1. The insurance marketplace is not nearly as diverse as it seems.
Insurance buyers often think that if they request quotes from multiple brokers, they will obtain the best pricing from a variety of insurance companies. The reality couldn’t be more different. Yes, there are thousands of insurance companies in the world, but most are very specialized and focus on providing specific coverage to specific industries. For most businesses there are realistically only 3 or 4 insurance companies in the WORLD that are able to compete for your business. Often, your current broker will shotgun applications out to all the available insurance companies for your industry, leaving a competing broker with few if any options to provide you with a realistic solution.
2. You miss out on creative new approaches to risk management and risk transfer.
When you utilize the RFQ/RFP approach to select your insurance broker, you are trapping the brokers in a very small box. As organizations increase in size and complexity, the number of options available for risk transfer expands exponentially. If you aren’t allowing your broker to be a consultant and advise you on the most cost-effective and tax-friendly risk transfer methods, then you aren’t receiving the benefit of their expertise.
During my discussion with the purchasing officer for this large global organization, I asked if they had a captive in place to take advantage of the tax benefits offered by a wholly owned insurance subsidiary. As it turns out, this had never been mentioned by their existing broker and wasn’t even part of the conversation. I explained that this is a perfect example of why the RFP/RFQ process fails: if you don’t allow me to do the job I am hired for, then you are not going to get the best results. My job is to help you figure out the most cost-effective way to manage your organization’s risk, and I can’t do that based on an RFP.
3. Broker expertise and relationships matter more than you would like to think.
One of the dirty secrets of the insurance industry, especially when you get into larger and more complex commercial accounts, is that the pricing is largely subjective. While the industry wants you to think that underwriters have magical formulas that taken into account a million variables and somehow determine the perfect pricing for your account, the scary reality is that it often looks a lot more like negotiations at a yard sale.
Industry specialization and expertise are the norm in all other professional services. You don’t use a personal injury lawyer for corporate litigation; you don’t use a small business accountant to complete a Fortune 500 audit. Somehow insurance has been treated differently, with price becoming the only factor involved in the decision.
Experience and expertise matter because underwriters learn to trust quality brokers. My job as your broker is not to sell you insurance, my job is to sell you to an underwriter and convince them that you deserve the best pricing possible. If your broker doesn’t understand the complexities of your industry or have the experience placing the coverage you are seeking, you are not going to receive the preferred treatment that a quality broker will get you. It seems unfair, but it is the truth.
4. Insurance company underwriters don’t like to waste their time.
A good insurance broker understands the value of long-term insurance company relationships and doesn’t want to waste an underwriter’s time. This may sound like a bad thing for you as the customer, but the reality is that once you, your broker, and the underwriter have developed a positive working relationship, you can create a long term relationship with the insurance company that will lead to more stable insurance pricing and coverage throughout market cycles.
By taking the shotgun approach to quoting insurance, your organization risks burning bridges with the handful of insurance companies that could serve you. A good broker should go into the quoting cycle knowing the market conditions and should have a good idea of where you will end up, rather than burning bridges with multiple underwriters by submitting business to them that they realistically can’t win.
5. Your broker should be your advisor, not your order taker.
Are you an expert in business risk management? Do you have experience developing complex risk transfer programs? Probably not, so why are you telling your broker what you need?
A good broker will take the time to learn about your organization and what makes it unique. We look at your business from all angles and develop a model for potential losses. Once we evaluate the potential areas of loss for your business, we then work to determine what amount of risk your business can retain and how much we need to transfer to the insurance marketplace.
Only once this comprehensive review has been completed do we go to market for insurance proposals. Nearly all brokers represent the same insurance companies, so selecting the broker you feel can best protect your interests is much more important than how many brokers you are getting quotes from.
Don’t get caught in the revolving broker game. Find an expert in your industry who you can trust, and work with them. Treat the selection of your insurance broker just like you would any other professional services provider, whether that be your doctor or your lawyer. In either case, you want someone that specializes in the problem you are trying to solve.